"Expansionary fiscal policy will tend to substantially increase current real output." Which of the following models would tend to support such a statement?

Question

Quizplus · Accepted Answer

The statement is in line with the assumptions of the Keynesian model which suggests that during a recession, an increase in government spending can lead to an increase in aggregate demand which in turn leads to an increase in output. However, crowding-out occurs when the increase in government spending leads to an increase in interest rates, leading to a decrease in private investment and hence counteracting the positive effects of fiscal policy. The new classical model suggests that individuals are rational and forward-looking and would not be fooled by expansionary fiscal policy which would only lead to inflation in the long run. Therefore, the Keynesian model supports the statement, whereas the crowding-out and the new classical models do not fully support it.

"Expansionary Fiscal Policy Will Tend to Substantially Increase Current Real