An increase in government spending
A)increases the interest rate and so investment spending increases.
B)increases the interest rate and so investment spending decreases.
C)decreases the interest rate and so increases investment spending increases.
D)decreases the interest rate and so investment spending decreases.

Question

Quizplus · Accepted Answer

An increase in government spending leads to an increase in demand for goods and services in the economy. This increased demand can lead to an increase in the interest rates in the short run. Higher interest rates increase the cost of borrowing for firms, which can discourage them from investing. Therefore, investment spending is likely to decrease in the short run.

An Increase in Government Spending