Question

A decrease in government spending a. increases the interest rate and so investment spending increases. b. increases the interest rate and so decreases investment spending decreases. c. decreases the interest rate and so investment spending increases. d. decreases the interest rate and so investment spending decreases.

Answer 1

Answer:

A decrease in government spending decreases the interest rate and so investment spending increase.

Option: (c)

Explanation:

• When Government spending decreases whereas the income increases, that makes to higher demand and increased production.

• To help with growth and reduce unemployment, the government decreases taxes and it increases spending or keep spending constant or keep tax constant as a result it increases the investment cost and decreases the interest rate.

• Increased government spending will cause a rise in 'aggregate demand'. This can lead to 'higher growth' in short term.