Suppose government expenditures on goods and services increase,transfers are unchanged,and taxes rise by less than the increase in expenditures.These changes in the government's budget cause
A)both the equilibrium interest rate and the equilibrium quantity of loanable funds to fall.
B)both the equilibrium interest rate and the equilibrium quantity of loanable funds to rise.
C)the equilibrium interest rate to rise and the equilibrium quantity of loanable funds to fall.
D)the equilibrium interest rate to fall and the equilibrium quantity of loanable funds to rise.

Question

Quizplus · Accepted Answer

An increase in government expenditures will lead to an increase in the demand for loanable funds, causing an increase in the equilibrium interest rate. At the same time, the decrease in disposable income resulting from the increased taxes will lead to a decrease in saving, causing a decrease in the supply of loanable funds, and a decrease in the equilibrium quantity of loanable funds. Transfers being unchanged will not have any direct effect on the market for loanable funds. Therefore, the correct choice is C.

Suppose Government Expenditures on Goods and Services Increase,transfers Are Unchanged,and