If increasing government spending also increases the price level, we would expect the level of interest rates to ________ and investment to ________.
A)decrease; decrease
B)increase; decrease
C)increase; increase
D)decrease; increase

Question

Quizplus · Accepted Answer

If government spending increases, it puts pressure on the demand for goods and services, which leads to an increase in their prices. To counter this effect, the central bank may increase interest rates to decrease aggregate demand and reduce inflationary pressures. Higher interest rates would make borrowing more expensive for firms, reducing their investment spending. Therefore, we would expect interest rates to increase and investment to decrease if government spending increases and pushes up the price level.

If Increasing Government Spending Also Increases the Price Level, We