In the classical model,beginning from an equilibrium in which the government is running a budget surplus,an increase in government spending will
A) lower the wage rate
B) increase the supply of loanable funds
C) cause total spending to decline
D) cause total spending to increase
E) leave total spending unchanged

Question

Quizplus · Accepted Answer

In the classical model, an increase in government spending will be offset by a decrease in private investment due to the increase in interest rates. As a result, total spending will remain unchanged. This is known as the crowding-out effect. Furthermore, a budget surplus implies that the government is saving or reducing its debt, so the increase in spending will be financed by reducing the surplus or increasing the deficit.

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