Which of the following are effects of an increase in government spending financed by a tax increase?
A)the tax increase reduces consumption;the change in the interest rate reduces residential construction
B)the tax increase reduces consumption;the change in the interest rate raises residential construction
C)the tax increase raises consumption;the change in the interest rate reduces residential construction.
D)the tax increase raises consumption;the change in the interest rate reduces residential construction

Question

Quizplus · Accepted Answer

An increase in government spending financed by a tax increase will reduce disposable income which  will lead to a fall in consumption. The reduction in consumption will lead to a fall in aggregate demand which in turn will lower the interest rate. The lower interest rate will make it less attractive to invest in residential construction leading to a reduction in residential construction.

Which of the Following Are Effects of an Increase in Government