Suppose policy makers pass a budget that reduces the budget deficit.A deficit reduction package such as this has a greater chance of increasing current output when
A)the policy is front-loaded.
B)financial markets believe that taxes will not increase in the future.
C)financial markets believe the Fed will lower interest rates in the future.
D)all of the above
E) none of the above

Question

Quizplus · Accepted Answer

If financial markets believe the Fed will lower interest rates in the future, it can stimulate investment and consumption, offsetting the contractionary effects of deficit reduction and potentially increasing current output.

Suppose Policy Makers Pass a Budget That Reduces the Budget