An increase in government spending that is NOT financed by an increase in taxes will cause which of the following?
A) an increase in interest rates and an increase in planned investment
B) an increase in interest rates and a reduction in planned investment
C) a reduction in interest rates and an increase in planned investment
D) a reduction in interest rates and a reduction in planned investment

Question

Quizplus · Accepted Answer

When government spending increases without a corresponding increase in taxes, it leads to an increase in the demand for goods and services. As a result, there is an increase in demand for money to fund these expenditures, leading to an increase in interest rates. This increase in interest rates discourages planned investment, as it becomes more expensive for businesses to borrow money to fund their investment projects. Therefore, there is a reduction in planned investment.

An Increase in Government Spending That Is NOT Financed by an Increase