Suppose policy makers implement an unexpected fiscal expansion.Further assume that monetary policy is expected to keep interest rates constant in response to this unexpected fiscal expansion.Given this information,we would expect that
A)stock prices will rise.
B)stock prices will remain constant.
C)this policy will have an ambiguous effect on stock prices.
D)the effect on stock prices will depend on the slope of the IS curve.

Question

Quizplus · Accepted Answer

The unexpected fiscal expansion increases aggregate demand, which leads to higher output and corporate profits. Therefore, the stock prices will rise in response to this expansion. The assumption of constant interest rates implies that monetary policy is accommodating the fiscal expansion, reinforcing the positive effect on the stock market.

Suppose Policy Makers Implement an Unexpected Fiscal Expansion