Suppose there is a fiscal expansion in the current period.This fiscal expansion will tend to cause a smaller increase in current output when
A)an increase in current output causes an increase in expected future output.
B)an increase in the current interest rate causes expectations of expansionary monetary policy in the future.
C)an increase in the current interest rate causes an increase in expected future interest rates.
D)both A and B
E) all of the above

Question

Quizplus · Accepted Answer

Option C states that an increase in the current interest rate causes an increase in expected future interest rates. In this case, households and firms might expect tighter monetary policy in the future, which could reduce the effectiveness of fiscal policy. This reduced effectiveness could lead to a smaller increase in current output, as mentioned in the question. Options A and B are irrelevant because they do not directly affect the impact of fiscal policy on current output.

Suppose There Is a Fiscal Expansion in the Current Period