Which of the following will be most likely to dampen the expansionary effects of an increase in government spending financed by borrowing?
A) The budget deficit will cause business decision makers to become more optimistic.
B) The increase in demand for loanable funds as the result of borrowing will cause interest rates to rise and private investment to fall.
C) The increase in government spending will cause the money supply to expand, thereby causing an inflationary boom.
D) The additional borrowing will cause the central bank to buy more bonds, which will reduce aggregate demand.

Question

Quizplus · Accepted Answer

An increase in demand for loanable funds as the result of borrowing will cause interest rates to rise and private investment to fall. This will dampen the expansionary effects of the increase in government spending by reducing private investment, which would otherwise add to the demand for goods and services. Options A, C, and D are incorrect because they do not address the impact of borrowing on interest rates and private investment.

Which of the Following Will Be Most Likely to Dampen