Assume that policy makers pass a budget that calls for an increase in government spending. In an open economy, which of the following will occur as a result of this fiscal policy action?

Question

Quizplus · Accepted Answer

An increase in government spending can lead to a decrease in private saving because more resources are being consumed by the government, potentially leading to higher interest rates which can crowd out private investment (B). Additionally, increased government spending can lead to a worsening current account (C) as domestic consumption increases, potentially increasing imports. Thus, options A, B, and C are all possible outcomes, making E the correct choice.

Assume That Policy Makers Pass a Budget That Calls for an Increase