Question

An increase in Government Purchases of Goods and Services will cause an increase in the cost...

An increase in Government Purchases of Goods and Services will cause an increase in the cost of borrowing which will cause a decrease in Investment. True or false and why?

Business   Economics   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

True

An increase in governement purchases of goods and services means increase in government spending in the goods market. This will shift the downward sloping IS curve rightward as IS curve represents equilibrium in goods market. Rightward shift of IS curve implies that interest rate increases in the market. Interest rate is the cost of borrowing so as interest rate increases it means cost of borrowing also increases. As cost of borrwing increases, investment will decline. This is because as interest rate increases, return on funds increases so savings will increase and investment will decline. Thus, cost of borrowing and investment are inversely related. So, increase in Government Purchases of Goods and Services will cause an increase in the cost of borrowing which will cause a decrease in Investment.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
a) Explain why a $500 million increase in government purchases of goods and services will generated...
a) Explain why a $500 million increase in government purchases of goods and services will generated a bigger increase in real GDP than a $500 million increase in government transfer payments like Social Security and unemployment payments. b) The country of Boldovia has no unemployment benefits and a tax system that only uses lump sum taxes. The neighboring country of Moldovia has generous unemployment benefits and a tax system where residents must pay a percentage of their income. Which country...
D. Show why a $100 increase in government purchases of goods and services will have a...
D. Show why a $100 increase in government purchases of goods and services will have a larger effect on real GDP than a $100 increase in government transfers or a $100 decrease in taxes by completing the accompanying table. The economy has a marginal propensity to consume (MPC) of 0.6. When answers aren’t whole dollars round each answer to two (2) decimal places (e.g., 51.6678 = 51.67) before summing in 18 – 20. All submitted answers should also be entered...
The government purchases of goods & services G actually decreased slightly due to the coronavirus shutdowns...
The government purchases of goods & services G actually decreased slightly due to the coronavirus shutdowns (mainly due to school closures and curtailed government administration). Does it mean that the budget deficit (G – T) has decreased? Why or why not? Explain in 150-200 words.
The largest share of expenditures by state and local governments is for purchases of goods and...
The largest share of expenditures by state and local governments is for purchases of goods and services. national defense. transfer payments. interest payments. law enforcement. 2. Suppose a government has $4,000 billion of debt. This year, real GDP is $8,000 billion, the tax rate is 30 percent, and government spending is $2,000 billion. Which of the following is true? The deficit will decrease by $400 billion. The debt will increase by $400 billion. The deficit will increase by $400 billion....
true or false? In a recession, the Fed usually purchases short-term government securities to decrease interest...
true or false? In a recession, the Fed usually purchases short-term government securities to decrease interest rates and increase spending.
The Government may prevent negative external effects by levying a tax on goods and services that...
The Government may prevent negative external effects by levying a tax on goods and services that result in additional costs. Government intervention is needed to help "balance" negative externalities. With a negative external effect, the goods' value is higher than assumed. Because the social marginal cost curve is higher than the private marginal cost curve, the Government should intervene to increase taxes on goods such as imposing tariffs on polluting industries or taxing bad goods such as alcohol.Which is why...
Suppose government expenditures on goods and services increase, transfers are unchanged, and taxes rise by less...
Suppose government expenditures on goods and services increase, transfers are unchanged, and taxes rise by less than the increase in expenditures. These changes in the government’s budget cause Group of answer choices the equilibrium interest rate to rise and the equilibrium quantity of loanable funds to fall. both the equilibrium interest rate and the equilibrium quantity of loanable funds to rise. both the equilibrium interest rate and the equilibrium quantity of loanable funds to fall. the equilibrium interest rate to...
Slyvania is a communist country in which the central government determines what goods and services satisfy...
Slyvania is a communist country in which the central government determines what goods and services satisfy its citizens' needs, how the goods and services are produced, and how they are distributed. Which statement is likely to be true about Slyvania’seconomy?
Which of the following would cause the AD curve to shift to the left? An increase...
Which of the following would cause the AD curve to shift to the left? An increase in tax rates An increase in military purchases An increase in unemployment compensation A decrease in sales taxes A decrease in potential GDP Which of the following would cause the AD curve to shift to the right? An increase in sales taxes An increase in potential GDP A decrease in unemployment compensation An increase in social security payments A decrease in military purchases
An economy has GDP of 10,000; consumption of 6,000; government purchases of 1,000 and investment of...
An economy has GDP of 10,000; consumption of 6,000; government purchases of 1,000 and investment of 2,500. Net Exports = _______________; and Net Capital Outflow = _____________ What is the effect of an increase in the government purchases on Net Exports (Increase or Decrease) and on Net Capital Outflow (Increase or Decrease)
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT