If government spending increases,which of the following is most likely to occur?

Question

Quizplus · Accepted Answer

When government spending increases, it leads to an increase in demand for goods and services, which increases GDP. This increase in demand also leads to an increase in money demand, which increases the interest rate. However, as the government is taking more resources from the private sector to finance its spending, it may lead to a decrease in investment spending. Therefore, GDP and money demand will increase, while the interest rate will increase, and investment spending will decrease. Option A is incorrect because an increase in government spending does not always lead to an increase in investment spending. Option B is incorrect because an increase in government spending does not always lead to a decrease in GDP and investment spending. Option D is incorrect because an increase in government spending does not always lead to a decrease in GDP, and an increase in the interest rate does not always lead to a decrease in investment spending. Option E is incorrect because an increase in government spending will lead to an increase in the interest rate.

If Government Spending Increases,which of the Following Is Most Likely