Question

If Congress decides to increase defense spending but does not increase taxes to cover the deficit spending, we can expect that

a. GDP will decrease.
b. consumer spending will decrease.
c. the money supply will increase.
d. interest rates will increase.
e. consumer spending will increase.

Answer 1

e. consumer spending will increase.

Step-by-step explanation:

If Congress decides to increase defense spending but does not increase taxes to cover the deficit spending, we can expect that consumer spending will increase because, unless in the event that the increase will be funded by borrowing from the private sector which will cause a crowding out effect, The increased spending by congress (government) will create a multiplier effect by causing job creation for the unemployed, which will imply that people will have more income to spend leading to rise in aggregate demand or consumer spending.

Furthermore, the fact that there will be no increase in taxes implies that consumers will have a higher disposable income for consumption purposes leading to a rise in consumer spending