Increases in the interest rate reduce the multiplier effect of an increase in government purchases.

Name: Increases in the interest rate reduce the multiplier effect of an increase in government purchases.
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Question

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When interest rates increase, it becomes more expensive for households and businesses to borrow money, which reduces their spending and investment. This results in a decrease in the overall multiplier effect of an increase in government purchases.

Increases in the Interest Rate Reduce the Multiplier Effect of an Increase