Higher interest rates and, therefore, a decrease in investment spending are most likely to be caused by which policy mix?
A)Deficit reduction and expansionary monetary policy
B)Larger deficits and contractionary monetary policy
C)Larger deficits and expansionary monetary policy
D)Deficit reduction and contractionary monetary policy

Question

Quizplus · Accepted Answer

When there are larger deficits (increased government spending), it puts upward pressure on interest rates because there is more competition for borrowing money in the market. To counteract this effect, the central bank may pursue a contractionary monetary policy by raising interest rates, further increasing the cost of borrowing and decreasing investment spending.

Higher Interest Rates And, Therefore, a Decrease in Investment Spending