Consider a closed-economy AD/AS macro model.An expansionary fiscal policy will generally increase the government's budget ________ and also tends to ________ and thus ________ private investment.

Question

Quizplus · Accepted Answer

An expansionary fiscal policy involves increasing government spending or decreasing taxes which leads to an increase in aggregate demand. This increase in aggregate demand is primarily driven by an increase in government expenditure. This leads to an increase in the government's budget deficit (as spending increases funding needs to increase). However, as aggregate demand increases, there is more pressure on the economy resulting in higher interest rates, which in turn decreases private investment. Therefore, the correct answer is C.

Consider a Closed-Economy AD/AS Macro Model