In the classical model,beginning from an equilibrium in which the government is running a budget surplus
A) the supply of loanable funds will be horizontal
B) an increase in government spending will cause the interest rate to rise
C) the supply of loanable funds will be vertical
D) an increase in government spending will crowd out less than an equal amount of private spending
E) a decrease in government spending will crowd out less than an equal amount of private spending

Question

Quizplus · Accepted Answer

According to the classical model, an increase in government spending will cause a decrease in the supply of loanable funds, leading to an increase in the interest rate. This is because the government will need to borrow more money to finance its spending, thus increasing the demand for loanable funds and driving up the interest rate. Choice A is incorrect because in the classical model, the supply of loanable funds is upward sloping. Choices C, D, and E are also incorrect as they do not accurately reflect the effects of changes in government spending in the classical model.

In the Classical Model,beginning from an Equilibrium in Which the Government