After the 2008 financial crisis, proponents of austerity argued that it was the appropriate policy because:
A)cuts in government spending would increase the interest rates that savers could earn and would therefore increase the supply of loanable funds.
B)cuts in government spending would keep interest rates on government debt low and improve investor confidence.
C)fiscal stimulus would likely cause deflation.
D)the lag associated with fiscal stimulus was too long.

Question

Quizplus · Accepted Answer

Proponents of austerity argued that cuts in government spending would keep interest rates on government debt low and improve investor confidence, which would in turn stimulate economic growth. This argument is based on the belief that by reducing government debt, investors would perceive the government as having a solid financial standing, which would improve their confidence in the economy. This, in turn, would encourage private investment, job creation, and consumer spending. However, recent studies have shown that austerity measures can be counterproductive and lead to further economic contraction.

After the 2008 Financial Crisis, Proponents of Austerity Argued That