The initial effect of an increase in the share of government purchases is
A)a decline in the share of GDP available for nongovernment purchases.
B)an increase in the share of GDP available for nongovernment purchases.
C)a decrease in interest rates.
D)an increase in interest rates.
E)a decrease in the nongovernment share of GDP.

Question

Quizplus · Accepted Answer

An increase in the share of government purchases would increase the government's demand for goods and services, leading to a decrease in the share of GDP available for nongovernment purchases. This is because the total output of the economy remains the same, but a larger share is now being allocated towards government purchases, leaving less available for nongovernment purchases.

The Initial Effect of an Increase in the Share of Government