Which of the following effects results from the change in the interest rate created by an increase in government spending?
A)the investment accelerator and crowding out
B)the investment accelerator but not crowding out
C)crowding out but not the investment accelerator
D)neither crowding out nor the investment accelerator

Question

Quizplus · Accepted Answer

An increase in government spending leads to an increase in interest rates, which makes it more expensive for businesses to borrow money to invest. This leads to a decrease in investment and, as a result, crowding out. However, there is no direct effect on the investment accelerator, which is determined by changes in income rather than changes in interest rates.

Which of the Following Effects Results from the Change in the Interest