Many economists believe that if fiscal policy turns contractionary to reduce the deficit,
A)monetary policy can turn expansionary to counteract the effects on aggregate demand.
B)monetary policy must be contractionary to reinforce the good effects of contractionary fiscal policy.
C)foreign investment in the United States must be encouraged.
D)taxes on the earnings from stock market gains should be increased.

Question

Quizplus · Accepted Answer

If fiscal policy turns contractionary to reduce the deficit, it can lead to a decrease in aggregate demand and potentially slow down the economy. To counteract this, monetary policy can turn expansionary by lowering interest rates or increasing the money supply, which would stimulate borrowing and spending. Therefore, choice A is the best answer. Choices B, C, and D are not directly related to the situation described.

Many Economists Believe That If Fiscal Policy Turns Contractionary to Reduce