When government expenditures increase,the interest rate
A)increases,making the change in aggregate demand larger.
B)increases,making the change in aggregate demand smaller
C)decreases,making the change in aggregate demand larger.
D)decreases,making the change in aggregate demand smaller.

Question

Quizplus · Accepted Answer

When government expenditures increase, the demand for goods and services increases, which in turn increases the demand for credit. This puts upward pressure on interest rates, making borrowing more expensive. As a result, the increase in government spending would be offset by a decrease in private investment due to the higher cost of borrowing. Therefore, the increase in aggregate demand resulting from government spending would be smaller than it would be if interest rates had remained constant.

When Government Expenditures Increase,the Interest Rate