An increase in government purchases is likely to
A)decrease interest rates.
B)reduce money demand.
C)crowd out investment spending by business firms.
D)All of the above are correct.

Question

Quizplus · Accepted Answer

An increase in government purchases is funded by borrowing which increases the demand for loanable funds, resulting in an increase in interest rates. This reduces the amount of investment spending by business firms, known as crowding out. Money demand may or may not be affected, so option B is not correct. Option D is incorrect because interest rates increase instead of decreasing. Therefore, the best choice is option C.

An Increase in Government Purchases Is Likely to