The federal government undertakes a large military buildup; the economy is at its potential level of output, all other things equal, the impact on the long-run real interest rate will be to:

Question

Quizplus · Accepted Answer

A large military buildup by the federal government will increase government spending and ultimately lead to increased demand for credit. As a result, the demand for loanable funds will increase, and with a fixed supply of funds, the price of credit, i.e., the interest rate, will rise. Hence, the long-run real interest rate will increase.

The Federal Government Undertakes a Large Military Buildup; the Economy