If the interest rate rises and government spending falls, what will happen to output, ceteris paribus?
A) It will rise.
B) It will stay the same.
C) It will fall.
D) It is uncertain what will happen.

Question

Quizplus · Accepted Answer

If the interest rate rises, it becomes more expensive for businesses and consumers to borrow money, which can lead to a decrease in investment and consumption spending. Additionally, if government spending falls, this will also lead to a decrease in overall spending in the economy. As a result, with a decrease in investment and consumption spending, and a decrease in government spending, output is likely to fall.

If the Interest Rate Rises and Government Spending Falls, What