A contractionary monetary policy combined with an expansionary fiscal policy will lead to
A)an increase in output and an ambiguous effect on the interest rate.
B)an increase in output and an increase in the interest rate.
C)an ambiguous effect on output and an increase in the interest rate.
D)an ambiguous effect on output and an ambiguous effect on the interest rate.

Question

Quizplus · Accepted Answer

The contractionary monetary policy will lead to an increase in the interest rate, and the expansionary fiscal policy will lead to an increase in output. The combined effect will likely have an ambiguous effect on output, as the two policies work in different directions, but will definitely lead to an increase in the interest rate.

A Contractionary Monetary Policy Combined with an Expansionary Fiscal Policy