An increase in government purchases or a decrease in taxes, other things being equal, will tend to:
A)increase interest rates and decrease investment.
B)increase interest rates and increase investment.
C)decrease interest rates and decrease investment.
D)decrease interest rates and increase investment.

Question

An increase in government purchases or a decrease in taxes, other things being equal, will tend to:
A)​increase interest rates and decrease investment.
B)​increase interest rates and increase investment.
C)​decrease interest rates and decrease investment.
D)​decrease interest rates and increase investment.

Quizplus · Accepted Answer

When there is an increase in government purchases or a decrease in taxes, it leads to an increase in aggregate demand which ultimately puts upward pressure on interest rates. This increase in interest rates will make borrowing more expensive for investors, causing a fall in investment. Therefore, the best choice is A, which implies an increase in interest rates and a decrease in investment.

An Increase in Government Purchases or a Decrease in Taxes