An increase in government spending raises income:
A)and the interest rate in the short run but leaves both unchanged in the long run.
B)in the short run but leaves it unchanged in the long run, while lowering investment.
C)in the short run but leaves it unchanged in the long run, while lowering consumption.
D)and the interest rate in both the short run and in the long run.

Question

Quizplus · Accepted Answer

In the short run, increased government spending boosts aggregate demand, raising income and interest rates. In the long run, the economy returns to potential output, leaving income unchanged, but higher interest rates can crowd out investment.

An Increase in Government Spending Raises Income