<p>Ok so my book tells me increases in govt spending means increase in interest rates which means increases in investment. but then that's not right because low interest rates increase investment because there's less risk. then, when if current account deficit (is that budget deficit?) increases, real GDP increases okay got that, income increases, but wait, the value of the currency depreciates? I thought it was the opposite?</p>
<p>WHAT IS WRONG WITH MACRO!</p>
<p>your book is wrong.</p>
<p>increase gov’t spending = decrease IR = increase investment</p>
<p>value of the currency will depreciate because due to the increase in incomes people of that country will buy more foreign goods (I just took a PT with this question)</p>
<p>I’m using the barron’s and i guess it’s so wrong!</p>
<p>Another way to look at it is if gov. borrows money from the private sector (loanable funds graph) in order to spend:</p>
<p>Demand of borrowers goes up, which increases Real interest rate, which decreases investment spending, decreasing AD (crowding out). This offsets some of the AD gains from the gov. spending. </p>
<p>(btw I use Barrons which page are you looking at?)</p>
<p>wait it appears to be on my Princeton Review book. I don’t know what to trust anymore T_T. The practice test in the Barron’s was wrong. And the info in princeton review is wrong. Why can’t people do their job?!</p>
<p>good luck to all tomorrow!!</p>
<p>Government spending doesn’t change interest rates. Only if the government starts dipping into the loanable funds market does interest start to change.</p>
<p>how does a decrease in CPI cause appreciation? It’s deflation and therefore is it because the buying power of one dollar is now higher?</p>
<p>haha welcome to real life:) anyways, my advice is to figure it out logically. Even though I’ve never read about a direct relationship between gov. spending and interest rate, this is what I think:</p>
<p>If the gov. does not borrow, AD increases, increasing price level and rGDP. An increase in rGDP increases income which increases consumption and investment. An increase in investment drives down interest rates for everyone. </p>
<p>I have a nagging feeling that something’s still missing…</p>
<p>@CantConcentrate</p>
<p>or that, haha</p>
<p>I can’t even get 5 answers in a row correct on the freakin practice exam. SCREW ALL OF IT!</p>
<p>BTW: When does interest rate attract investors? At times it does and at times it does not! I’m so confused I’m miserable!</p>
<p>higher interest rates attract foreign investors (bond rates). lower interest rates attract domestic investment I believe</p>
<p>^^ An increase in investments would increase interest rates, no? Increased investments would cause a positive shift in AD and a positive shift in money demanded in the money market, increasing nominal interest rate. More people investing would mean that there is less money to borrow at the same demand, causing interest rates to increase…</p>
<p>Yeah increased government investments cause crowding out and higher interest rates.</p>