If the government increases spending while holding taxes constant, we expect
A) an increase in investment spending by businesses too, as they anticipate future economic growth.
B) a decrease in real saving as consumers follow suit and also increase borrowing.
C) planned real investment spending by businesses to increase.
D) interest rates to rise.

Question

Quizplus · Accepted Answer

When the government increases spending while holding taxes constant, it typically finances this additional spending by borrowing more. This increased demand for loanable funds tends to push interest rates up, as there is now more competition for those funds. Higher interest rates can make borrowing more expensive for businesses and consumers, potentially affecting investment and spending decisions.

If the Government Increases Spending While Holding Taxes Constant, We