The diagram below is for a closed economy which begins in long-run equilibrium at Y* and . FIGURE 31-3
-Refer to Figure 31-3.Suppose the government in this closed economy implements an expansionary fiscal policy,which increases the budget deficit.When the economy reaches its new long-run equilibrium,how has the composition of national income changed?

Question

The diagram below is for a closed economy which begins in long-run equilibrium at Y* and  .  FIGURE 31-3
-Refer to Figure 31-3.Suppose the government in this closed economy implements an expansionary fiscal policy,which increases the budget deficit.When the economy reaches its new long-run equilibrium,how has the composition of national income changed?

Quizplus · Accepted Answer

An expansionary fiscal policy that increases the budget deficit typically leads to higher interest rates, which crowds out private investment, causing investment to fall in the long-run equilibrium.

The Diagram Below Is for a Closed Economy Which Begins