The new classical model implies that a shift to a more expansionary fiscal policy (the substitution of debt financing for taxes) will
A) stimulate aggregate demand and employment.
B) retard aggregate demand and employment.
C) increase the real rate of interest.
D) exert little or no impact on the real interest rate, aggregate demand, and employment.

Question

Quizplus · Accepted Answer

According to the new classical model, changes in fiscal policy, such as substituting debt financing for taxes, may not have a significant impact on aggregate demand, employment, or the real interest rate in the long run. This is because individuals are forward-looking and will anticipate future tax increases or interest rate changes, which will offset any short-term benefits of expansionary fiscal policy. Therefore, the best choice is D.

The New Classical Model Implies That a Shift to a More