Suppose there is an increase in government spending. Such a fiscal policy action will cause:
A) the natural real interest rate to rise.
B) the natural real interest rate to fall.
C) ambiguous effects on the natural real interest rate.
D) no effect on the natural real interest rate.
E) the natural real interest rate falls when the nominal rate falls.

Question

Quizplus · Accepted Answer

An increase in government spending typically leads to higher demand for goods and services, which can push up the natural real interest rate as the economy seeks to balance savings and investments at a higher level of economic activity.

Suppose There Is an Increase in Government Spending