Question

If the government were to simultaneously cut the personal income tax and the corporate profits tax, the equilibrium interest rate Select one:

would fall. would be unaffected. would rise. would be ambiguous.

Answer 1

Answer is (a) " Would fall"

# The eqilibrium interest rate is ties to the demand and the supply of the money. The interest rate occur at the orice where the demand for a perticular amount of money eqauls the supply of the money.

Tax to the goverment is the revenue made by the goverment. Now if the goverment cuts the personal tax and corporate profits tax simultaneously then this will result in a lower tax revenue. This in turn leads to higher demand for the bonds. This increases the price of the bond and as we know that there exist an inverse relation between the bond price and interest rates. Hence as the bond price rises this will lead to fall in the interest rate.

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