According to the classical model,if the government lowers its budget deficit,which of the following will occur?
A) The interest rate will rise,and consumption,investment and output will all decrease.
B) The interest rate will fall,consumption and investment will increase,but output will not change.
C) The interest rate will rise,and consumption,investment and output will all increase.
D) The interest rate will fall,and consumption,investment and output will all increase.
E) The interest rate will fall,consumption will not change,but investment and output will both increase.

Question

Quizplus · Accepted Answer

According to the classical model, when the government lowers its budget deficit, it reduces the demand for loanable funds, leading to a decrease in the interest rate. The lower interest rate stimulates consumption and investment, but since output depends on the supply side factors of the economy, it does not change immediately. Therefore, the correct option is B - the interest rate will fall, consumption and investment will increase, but output will not change.

According to the Classical Model,if the Government Lowers Its Budget