As a government adopts an expansionary fiscal policy:
A) the demand for loanable funds increases causing interest rates to rise.
B) the demand for loanable funds decreases causing interest rates to fall.
C) the supply of loanable funds increases causing interest rates to rise.
D) the supply of loanable funds decreases causing interest rates to fall.
E) neither the supply nor the demand for loanable funds changes.

Question

Quizplus · Accepted Answer

An expansionary fiscal policy typically involves increased government spending and/or tax cuts, which leads to higher budget deficits. To finance these deficits, the government borrows more, increasing the demand for loanable funds. This increased demand tends to push interest rates up.

As a Government Adopts an Expansionary Fiscal Policy