With the economy at its potential level of output, the federal government undertakes a large military buildup; all other things equal, the impact on the long-run real interest rate will be to:
A) increase.
B) decrease.
C) remain constant since output is at its potential level.
D) change at the same rate as inflation.

Question

Quizplus · Accepted Answer

When the federal government undertakes a large military buildup, it increases its demand for borrowing, which can lead to an increase in the long-run real interest rate as lenders compete for the available funds. This occurs because the increase in the demand for borrowing without a corresponding increase in supply will cause interest rates to rise. The increase in the interest rate will reduce private investment, leading to a lower level of economic growth in the long run.

With the Economy at Its Potential Level of Output, the Federal