Expansionary fiscal policy can be successful without a negative impact on the level of investment if
A)the government spending increase is financed by a tax increase
B)the Fed undertakes open market sales at the same time
C)it is implemented via an investment subsidy rather than a cut in personal income taxes
D)money demand is completely interest inelastic
E)it is implemented through a cut in personal income taxes rather than an increase in government purchases

Question

Quizplus · Accepted Answer

Implementing fiscal policy through an investment subsidy encourages private sector investment which can offset any potential reduction in investment caused by increased government spending. On the other hand, options A and E both involve changes in taxes which can affect investment decisions. Option B involves the Fed selling bonds to decrease money supply which would decrease investment. Option D is unlikely as there will always be some degree of interest elasticity in money demand.

Expansionary Fiscal Policy Can Be Successful Without a Negative Impact