If government spending rises but the central bank changes the money supply to prevent income from changing,then
A)both consumption and investment will remain unchanged.
B)consumption rises and investment falls.
C)investment falls but consumption rises.
D)both consumption and investment rises.

Question

Quizplus · Accepted Answer

When the government increases spending but the central bank adjusts the money supply to keep income constant, interest rates typically rise to counteract inflationary pressures. Higher interest rates make borrowing more expensive, which tends to reduce investment. However, the increase in government spending can lead to a rise in consumption due to the multiplier effect, where increased government spending leads to higher income and thus higher consumption.

If Government Spending Rises but the Central Bank Changes the Money