The equilibrium effects of a temporary increase in government spending include
A)a decrease in the real wage and an increase in the real interest rate.
B)an increase in the real wage and a decrease in the real interest rate.
C)a decrease in the real wage and a decrease in the real interest rate.
D)real wages and the real interest rate remaining unchanged.
E)an increase in the real wage and an increase in the real interest rate.

Question

Quizplus · Accepted Answer

A temporary increase in government spending typically leads to an increase in demand for goods and services, which can push up prices and interest rates. As the demand for labor rises to meet the increased production needs, the real wage (wage adjusted for inflation) may decrease because the price level is rising faster than nominal wages. Additionally, to finance the increased spending, the government may borrow more, leading to an increase in the real interest rate as the demand for loanable funds increases.

The Equilibrium Effects of a Temporary Increase in Government Spending