Question

A decrease in government spending (this question is Extra credit) a. increases the interest rate and so decreases investment spending decreases. b. increases the interest rate and so investment spending increases. c. decreases the interest rate and so investment spending increases. d. decreases the interest rate and so investment spending decreases.

Answer 1

b. increases the interest rate and so investment spending increases.

Step-by-step explanation:

According to the IS-LM framework,

An increase in government spending shifts IS upward resulting in higher interest rate as well as GDP. The higher interest rate will hamper investment spending.