Assume there is an increase in government spending and a reduction in net taxes.With a specific money supply, the consequent
A)contractionary impact might be lessened by the resulting increase in the interest rate.
B)expansionary impact might be lessened by the resulting increase in the interest rate.
C)contractionary impact might be enhanced by the resulting decline in the interest rate.
D)expansionary impact might be enhanced by the resulting decline in the interest rate.

Question

Quizplus · Accepted Answer

An increase in government spending and a reduction in net taxes are expansionary fiscal policies. However, these can lead to higher interest rates due to increased demand for money, which can dampen the expansionary impact by making borrowing more expensive.

Assume There Is an Increase in Government Spending and a Reduction