The diagram below is for a closed economy which begins in long- run equilibrium at Y*.
FIGURE 32- 3
-Refer to Figure 32- 3. Suppose the government 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*.
  FIGURE 32- 3
-Refer to Figure 32- 3. Suppose the government 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 can crowd out private investment, causing investment to fall.

The Diagram Below Is for a Closed Economy Which Begins