Suppose the government increases spending by $30 billion and raises taxes by $20 billion at the same time. Then:

Question

Quizplus · Accepted Answer

When the government increases spending and raises taxes simultaneously, the net effect is an increase in demand for funds, which typically leads to higher interest rates. This is because the government's increased spending (even partially offset by higher taxes) tends to increase the overall demand for money and credit, putting upward pressure on interest rates.

Suppose the Government Increases Spending by $30 Billion and Raises