As a government adopts a contractionary fiscal policy:
A) the demand for loanable funds increases causing interest rates to rise.
B) the demand for loanable funds decreases causing interest rates to fall.
C) the supply of loanable funds increases causing interest rates to rise.
D) the supply of loanable funds decreases causing interest rates to fall.
E) the supply of loanable funds does not change and interest rates fall.

Question

Quizplus · Accepted Answer

A contractionary fiscal policy typically involves reducing government spending and/or increasing taxes. This leads to a decrease in the budget deficit or an increase in the budget surplus, which means the government borrows less. As a result, the demand for loanable funds decreases, causing interest rates to fall.

As a Government Adopts a Contractionary Fiscal Policy