Final answer:
The effect on the economy of a fall in real interest rates and a rise in business taxes depends on which of the two effects is stronger and cannot be determined without more context. Lower interest rates can stimulate economic activity, while higher business taxes can hinder it.
Step-by-step explanation:
If the real interest rate falls and business taxes rise, the likely effect on the economy can be multifaceted. A lower real interest rate typically encourages borrowing and investment because the cost of borrowing decreases, which can stimulate economic expansion. However, an increase in business taxes can have a contractionary effect because it reduces the after-tax profits of businesses, possibly leading to reduced levels of investment and hiring.
These two opposing effects mean the net impact on the economy cannot be determined without additional information. If the stimulative effect of lower interest rates is stronger than the dampening effect of higher business taxes, the economy may expand. Conversely, if the negative impact of higher taxes outweighs the positive effect of lower interest rates, the economy may contract.
In summary, the effect on the economy of a fall in real interest rates coupled with a rise in business taxes necessitates further context to determine the overall impact, such as the prevailing economic conditions, the magnitude of the interest rate change, and the size of the tax increase.