If the government share of GDP equals 25 percent of GDP and the nongovernment share of GDP equals 85 percent of GDP, then
A)interest rates will increase until the government share of GDP declines to 20 percent.
B)nothing will happen unless the government reduces its share of purchases.
C)interest rates will decrease, resulting in a decrease in the investment, consumption, and net export shares.
D)interest rates will increase, resulting in a decline in the investment, consumption, and net export shares.
E)GDP will increase, shrinking each share until the sum of all shares equals 1.

Question

Quizplus · Accepted Answer

When the government share of GDP increases, it leads to a decrease in the nongovernment share of GDP. This, in turn, leads to an increase in interest rates, making borrowing for investment more expensive, reducing consumption and net export shares as well. Hence, interest rates will increase, resulting in a decline in the investment, consumption, and net export shares.

If the Government Share of GDP Equals 25 Percent of GDP