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If the government decreases taxes and government spending by the same amount, what happens to the...

If the government decreases taxes and government spending by the same amount, what happens to the real interest rate in the loanable funds market?

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Answer : If government decrease the tax rate then the demand for loan will increase. As a result, the demand curve in loanable fund market will shift to rightward. Now if government decrease the spending by the same amount of tax decrease then the demand for loanable fund will decrease by the same amount of increased demand due to tax cut. As a result, the demand curve in loanable fund market will shift to leftward and will reach at initial demand curve. As a result, the real interest rate stays same as before. So, if tax rate decrease and government spending decrease by the same amount then the real interest rate will not change in the loanable fund market.

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