Question

If government spending increases or personal income taxes decrease, what are the likely effects on output, price level, and interest rates?

Price Level / Output / Interest Rates


1) Increase / Increase / Decrease

2) Increase / Increase / Increase

3) Decrease / Increase / Decrease

4) Decrease / Decrease / Decrease

5) Decrease / Decrease / Increase

Answer 1

When there is an increase in government spending, there will be an increase on the output, price level, and interest rates

What is a government spending?

This refers to the funds injected to the public sector on the acquisition of services such as education, healthcare, social protection, defense etc.

Most time, the effect of an an increase in government spending leads to an increase on the output, price level, and interest rates as it is a method of stimulate demand.

Therefore, the Option A is correct.

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