Refer to the information provided in Figure 26.5 below to answer the question(s) that follow. Figure 26.5
-Refer to Figure 26.5. Which of the following combinations would definitely increase the equilibrium interest rate?
A) government spending increases and the price level increases
B) government spending increases and the price level decreases
C) government spending decreases and the price level increases
D) government spending decreases and the price level decreases

Question

Refer to the information provided in Figure 26.5 below to answer the question(s) that follow.  Figure 26.5
-Refer to Figure 26.5. Which of the following combinations would definitely increase the equilibrium interest rate?
A) government spending increases and the price level increases 
B) government spending increases and the price level decreases 
C) government spending decreases and the price level increases 
D) government spending decreases and the price level decreases

Quizplus · Accepted Answer

An increase in government spending would shift the demand curve for loanable funds to the right, leading to an increase in the equilibrium interest rate. An increase in the price level would shift the supply curve for loanable funds to the left, leading to a decrease in the equilibrium interest rate. However, the effect of the increase in government spending on the interest rate would be greater than the effect of the increase in the price level, resulting in a net increase in the equilibrium interest rate.

Refer to the Information Provided in Figure 26