Increases in government spending will lower the long-term growth rate of GDP if it lowers ________ spending and the government purchases ________ goods and not ________ goods.
A)net export spending; investment; consumption
B)consumption; investment; consumption
C)net export spending; consumption; investment
D)investment; consumption; investment

Question

Quizplus · Accepted Answer

Increases in government spending can lower the long-term growth rate of GDP if it reduces investment spending (due to crowding out effect) and if the government purchases are more oriented towards consumption goods rather than investment goods. Investment goods are crucial for increasing the productive capacity of the economy, whereas consumption goods do not have the same effect.

Increases in Government Spending Will Lower the Long-Term Growth Rate