Answer to Question #254322 in Macroeconomics for mbudzeni

Question

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

interest rates?

Answer 1

Output will increase and interest rates will fall.

Output increases because expansionary fiscal policy boosts aggregate demand and the level of employment in the economy.

Interest rates fall because expansionary fiscal policy involves actions such as the central bank buying treasury notes, reducing interest rates on loans to banks or reducing the reserve requirement. All this result in lower interest rates because they increase money supply in the economy.