In the classical model,a temporary increase in government purchases causes
A)a decrease in output and the real interest rate.
B)a decrease in output and an increase in the real interest rate.
C)an increase in output and a decrease in the real interest rate.
D)an increase in output and the real interest rate.

Question

Quizplus · Accepted Answer

In the classical model, a temporary increase in government purchases is typically financed through borrowing, which increases the demand for loanable funds. This leads to an increase in the real interest rate. Higher interest rates discourage some private investment, but the direct effect of increased government spending usually leads to an overall increase in output. Hence, both output and the real interest rate increase.

In the Classical Model,a Temporary Increase in Government Purchases Causes