Arrange the following steps in the correct order to illustrate how a decrease in government spending impacts interest rates and economic activity: A. Decreased government spending reduces demand for loanable funds. B. Lower demand leads to a decrease in real interest rates. C. Reduced interest rates stimulate investment spending. D. Increased investment spending boosts aggregate demand and economic output.

When the government decreases its spending, it reduces the overall demand for loanable funds, which is the money available for borrowing. This reduced demand leads to lower real interest rates, making it cheaper for people and businesses to borrow money. As borrowing costs decrease, it encourages more investment spending by businesses, which can include buying new equipment or expanding operations. This increase in investment spending then boosts aggregate demand, leading to higher economic output. For example, if a factory invests in new machinery, it may produce more goods, hire more workers, and contribute to overall economic growth.