Question:
If the government simultaneously engages in expansionary monetary and fiscal policies, which of the following is the effect on interest rate and unemployment?
(1) Indeterminate / Decreases
(2) Increases / Indeterminate
(3) Decreases / Indeterminate
(4) Indeterminate / Decreases
(5) Indeterminate / Increases
Correct Answer:
(4)
Answer Explanation:
Expansionary fiscal and monetary policies both shift Aggregate Demand to the right, heavily stimulating the economy, which definitively decreases unemployment. However, expansionary fiscal policy drives interest rates up (government borrowing), while expansionary monetary policy drives interest rates down (more money supply). Therefore, the final interest rate is indeterminate.
Topic: Macroeconomic Policy Year: 2019
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