If the government finances an increase in government purchases with an increase in taxes, which of the following would you not expect to see?
A)an increase in the exchange rate
B)a decrease in the interest rate
C)an increase in aggregate demand
D)a decrease in net exports
E)a decrease in private investment

Question

Quizplus · Accepted Answer

If the government finances an increase in government purchases with an increase in taxes, it would lead to a decrease in disposable income and therefore, a decrease in private consumption. This would lead to a decrease in aggregate demand for goods and services. As a result, there would be a decrease in net exports, and the exchange rate would fall. However, an increase in taxes can also decrease private investment. The interest rate might not decrease because the government purchases would increase the demand for loanable funds.

If the Government Finances an Increase in Government Purchases with an Increase