Suppose policymakers pass a budget that reduces the budget deficit. A deficit reduction package such as this has a greater chance of increasing current output when:
A) financial markets believe that taxes will not increase in the future.
B) the policy features larger cuts today and smaller cuts in the future.
C) financial markets believe that RBA will raise interest rates in the future.
D) financial markets believe that output will not increase in the future.
E) financial markets believe the RBA will lower interest rates in the future.

Question

Quizplus · Accepted Answer

If financial markets believe the RBA will lower interest rates in the future, it can stimulate investment and consumption, thereby increasing current output.

Suppose Policymakers Pass a Budget That Reduces the Budget Deficit