Increases in government spending financed through additional borrowing will typically have the largest impact on aggregate demand when:
A) the stock market and other private investments are booming.
B) increased uncertainty causes a decrease in private sector investing.
C) interest rates are high.
D) private sector spending is high.

Question

Quizplus · Accepted Answer

When there is increased uncertainty in the private sector, businesses are less likely to invest in new projects and instead hold on to their money or save it for future use. This means that there is less private sector spending which can be compensated for by an increase in government spending, which can stimulate aggregate demand. Additionally, if the private sector is already spending heavily, an increase in government spending may not have as large of an impact on aggregate demand.

Increases in Government Spending Financed Through Additional Borrowing Will Typically