Increases in government spending financed through additional borrowing will typically:
A) provide more stimulus than when government spending is financed through higher taxes.
B) lead to higher taxes.
C) stimulate both consumption and investment.
D) lead to higher interest rates.

Question

Quizplus · Accepted Answer

When government spending is financed through additional borrowing, it increases the demand for loanable funds in the economy. This increased demand for loanable funds leads to higher interest rates since borrowers will have to pay more to access the funds. This increase in interest rates can discourage private investment and consumption, which can offset any stimulating effects of the increased government spending. Therefore, the correct answer is D.

Increases in Government Spending Financed Through Additional Borrowing Will Typically