What will an increase in government purchases or a decrease in taxes,other things being equal,tend to do?

Question

Quizplus · Accepted Answer

An increase in government purchases or a decrease in taxes will increase aggregate demand in the economy, leading to an increase in output and prices. This increase in demand will put upward pressure on interest rates as firms and individuals borrow more. Higher interest rates will make domestic assets more attractive to foreign investors, leading to an increase in the demand for the domestic currency and an increase in its value. This increase in the exchange rate will lead to a decrease in net exports as domestic goods become more expensive relative to foreign goods. Therefore, an increase in government purchases or a decrease in taxes will lead to an increase in interest rates and a decrease in net exports.

What Will an Increase in Government Purchases or a Decrease