Question

Choose the correct answers from the drop-down menus to explain the impact of fiscal policies on the economy. How can a contractionary fiscal policy affect inflation, unemployment, and interest rates? How can an expansionary fiscal policy affect the number of jobs, inflation, and interest rates?

1) Increase, decrease, increase
2) Decrease, increase, decrease
3) Increase, increase, decrease
4) Decrease, decrease, increase

Answer 1

An expansionary fiscal policy can increase inflation, reduce unemployment, and increase interest rates. A contractionary fiscal policy can control inflation, potentially increase unemployment, and decrease interest rates.

Step-by-step explanation:

An expansionary fiscal policy, which involves increasing government spending or reducing taxes, can have the following effects:

1. Inflation: An expansionary fiscal policy can potentially increase inflation as increased government spending or reduced taxes increase the overall demand for goods and services.
2. Unemployment: An expansionary fiscal policy can help decrease unemployment by stimulating economic growth and increasing employment opportunities through increased government spending.
3. Interest Rates: An expansionary fiscal policy can lead to higher interest rates as increased government spending and borrowing increase the demand for loanable funds.

A contractionary fiscal policy, which involves reducing government spending or increasing taxes, can have the following effects:

1. Inflation: A contractionary fiscal policy can help control inflation as reduced government spending or increased taxes decrease the overall demand for goods and services.
2. Unemployment: A contractionary fiscal policy can potentially increase unemployment as reduced government spending reduces job opportunities.
3. Interest Rates: A contractionary fiscal policy can lead to lower interest rates as reduced government borrowing decreases the demand for loanable funds.