Suppose an economy is in a recession and the government is experiencing a budget deficit. What will be a possible effect of the government's decision to borrow money in order to increase spending and real GDP?"
A)The government borrowing will increase the supply of money,causing interest rates to fall and investment spending to be crowded out.
B)The government borrowing will increase the demand for money,causing interest rates to rise and investment spending to be crowded out.
C)There will be no effect of government borrowing on investment spending or real GDP.
D)The government borrowing will increase the demand for money causing interest rates to rise and investment spending to increase.

Question

Quizplus · Accepted Answer

When the government borrows money, it increases the demand for loanable funds, causing interest rates to rise. As interest rates rise, investment spending may be crowded out as businesses are discouraged from borrowing money due to the high cost of borrowing. Therefore, option B is the most likely effect.

Suppose an Economy Is in a Recession and the Government