Use the following to answer questions : Figure: Fiscal Policy with a Fixed Money Supply -(Figure: Fiscal Policy with a Fixed Money Supply) Look at the figure Fiscal Policy with a Fixed Money Supply. Assume that this economy is at E₂. Now government deficit spending is decreased, but the Federal Reserve expands the money supply. According to this model: A)real GDP will decrease just as much as it would if the Federal Reserve had not expanded the money supply. B)real GDP will decrease, but not as much as it would if the Federal Reserve had failed to expand the money supply. C)real GDP will expand, but not as much as it would if the Federal Reserve had not expanded the money supply. D)interest rates will increase.

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The decrease in government deficit spending would typically reduce real GDP, but the Federal Reserve's expansion of the money supply can offset some of this decrease, resulting in a smaller reduction in real GDP than if the money supply had not been expanded.

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