Homework Answers
QUES: Option C is correct. Classical economist assumes that the economy will restore its equilibrium and there is no need for government intervention. In this case, as Government expenditure increases, demand for the loanable fund will increase in the loanable fund market as a demand curve for the loanable fund will shift to the right which increases the interest rate. There will be two effects of an increased rate of interest.
1. Investment declines as the opportunity cost of borrowing for the firms increase as interest rate increases.
2. At a higher interest rate, people will shift their consumption for the future and they start to increase their savings they earn more rate of interest.
Hence Option C is correct.
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