The model predicts that a temporary increase in government purchases causes:

Question

Quizplus · Accepted Answer

A temporary increase in government purchases typically leads to a reduction in gross investment due to the crowding-out effect, where increased government spending leads to higher interest rates, which in turn reduces investment spending by the private sector. Consumption may not necessarily decrease, and real GDP is likely to increase in the short term due to the increase in overall spending.

The Model Predicts That a Temporary Increase in Government Purchases