The long-run effect of increased government purchases is that the sum of consumption, investment, and net exports will be lower than it would be in the baseline case.

Question

Quizplus · Accepted Answer

Increased government purchases can lead to higher interest rates as the government competes for funds in the financial markets. This can crowd out private investment and reduce consumption due to higher borrowing costs. Additionally, a stronger domestic currency resulting from higher interest rates can reduce net exports by making domestic goods more expensive abroad. Consequently, the sum of consumption, investment, and net exports will be lower than it would be in the absence of the increased government purchases.

The Long-Run Effect of Increased Government Purchases Is That the Sum