Suppose that government expenditures on goods and services increase,transfers are unchanged,and taxes rise by less than the increase in expenditures.These changes in the government's budget make

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An increase in government expenditures leads to an increase in demand for loanable funds, which results in an increase in the interest rate. Since taxes rise by less than the increase in expenditures, the government will have to borrow more funds, which leads to a decrease in the equilibrium quantity of loanable funds. Therefore, the correct answer is (C) interest rate rises, and the equilibrium quantity of loanable funds fall.

Suppose That Government Expenditures on Goods and Services Increase,transfers Are