In the classical model,beginning from an equilibrium in which the government is running a budget surplus,
A) this will lower the wage rate
B) the demand for loanable funds will be horizontal
C) an increase in government spending will crowd out more than an equal amount of private spending
D) an increase in government spending will crowd out an equal amount of private spending
E) an increase in government spending will crowd out less than an equal amount of private spending

Question

Quizplus · Accepted Answer

In the classical model, an increase in government spending will lead to an increase in demand for loanable funds, causing the interest rate to rise. This increase in interest rate will lead to a decrease in private investment, which will cause a decrease in aggregate demand (crowding out). As a result, an increase in government spending will crowd out an equal amount of private spending.

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