Question

A decrease in government spending

a. decreases the interest rate and so investment spending increases.
b. decreases the interest rate and so investment spending decreases.
c. increases the interest rate and so investment spending increases.
d. increases the interest rate and so decreases investment spending decreases.

Answer 1

a. decreases the interest rate and so investment spending increases.

Step-by-step explanation:

An increase in government spending has a crowd-out effect on the economy as interest rate rises since government borrows more than many businesses in terms of size and volume. The opposite effect results when government spending decreases.