Suppose the government increases its expenditures by $100 billion and simultaneously reduces the money supply by $100 billion.We definitely know that
A)equilibrium GDP will fall.
B)equilibrium GDP will rise.
C)the interest rate will rise.
D)the interest rate will fall.

Question

Quizplus · Accepted Answer

When government expenditure increases, the aggregate demand increases, which causes an upward pressure on the interest rate. On the other hand, reducing the money supply leads to a decrease in the money available for lending, which also increases interest rates. Therefore, both actions lead to an increase in the interest rate. The effect on equilibrium GDP cannot be determined without additional information.

Suppose the Government Increases Its Expenditures by $100 Billion and Simultaneously