Question

Using the demand and supply of loanable funds, demonstrate the effect of the following on the interest rate. As a result, what would you expect to be the impact of the change on growth?

a. Government increases spending without increasing taxes.

Answer 1

The interest rate increases.

Step-by-step explanation:

When the government increases spending, without increasing taxes, it has to borrow from the loanable funds market. This increases the demand for loanable funds.

As a result, the demand curve moves to the right. This rightward shift in the demand curve will cause the interest rate to increase.

So an increase in government spending will cause interest rates to increase.