It Has Been Argued by Some That, "An Increase in Defense

question 14

Multiple Choice

It has been argued by some that, "An increase in defense spending will cause GDP to fall because the resulting higher interest rates will depress investment." What is wrong with that argument?

• A) Higher interest rates may depress investment, but that is a consequence of an increase in aggregate demand and thus GDP; GDP, therefore, will not fall.
• B) Every increase in defense spending is accompanied by an increase in tax receipts, so there is no interest rate increase to depress investment.
• C) Defense spending is not part of aggregate demand and thus has no effect on GDP.
• D) Higher interest rates stimulate investment; the sign of the effect is wrong.
• E) None of the above; the statement is true.

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Definitions:

Financial Rewards

Monetary benefits provided to employees or executives, often as a form of incentive or compensation.

High Risk

Refers to investments or financial decisions that carry a high potential for loss in conjunction with the possibility of generating significant returns.

Standard Deviation

A statistical measurement that quantifies the variation or dispersion of a set of data points from its mean, commonly used to gauge volatility in finance.

Diversified Portfolio

An investment strategy that spreads investments across various asset classes to reduce risk and increase the potential for returns.