Suppose policy makers implement a fiscal expansion that is NOT fully anticipated by financial market participants.We know that this will

Question

Quizplus · Accepted Answer

A fiscal expansion that is not fully anticipated by financial market participants can lead to an increase in output and income. In the short run, if the LM curve is very flat, an increase in output and income will lead to an increase in demand for money and, hence, an increase in interest rates. As a result, stock prices will fall. However, if the LM curve is relatively steep, an increase in output and income will not lead to a significant increase in interest rates. In this case, the increase in demand for goods and services will lead to an increase in profits, and hence, an increase in stock prices. Therefore, the correct answer is C.

Suppose Policy Makers Implement a Fiscal Expansion That Is NOT