An increase in deficit spending tends to raise interest rates, thereby resulting in a multiplier effect that is higher than what would be associated with an equivalent increase in consumption spending.

Question

Quizplus · Accepted Answer

Deficit spending can indeed raise interest rates by increasing demand for loanable funds, but the multiplier effect of government spending (including deficit spending) is not inherently higher than that of consumption spending. The multiplier effect depends on the marginal propensity to consume and other factors, not the source of spending.

An Increase in Deficit Spending Tends to Raise Interest Rates