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.