Answer to Question #250501 in Macroeconomics for Question 4 (2)

Question

An expansionary fiscal policy would most likely cause which of the following changes in output and interest rates?

Both output and interest rate will decrease.

Output will increase and interest rate falls.

Both output and interest rate will increase.

Output will fall and the interest rate increases.

Answer 1

B. Output will increase and interest rate will fall.

Expansionary fiscal policy improves aggregate demand which results in an increase in output and the level of employment.

The policy increases money supply in the economy and this leads to a fall in interest rates.