Question

Choose the correct answers from the drop-down menus to explain the impact of fiscal policies on the economy.
A contractionary fiscal policy can
inflation and
unemployment and interest rates.

An expansionary fiscal policy can
the number of jobs and can
inflation and reduce interest rates.

Answer 1

Suggested answers:

- A contractionary fiscal policy can reduce inflation and increase unemployment and reduce interest rates.
(It lowers aggregate demand, easing price pressures; it also lowers government borrowing which tends to put downward pressure on interest rates, but raises unemployment.)

- An expansionary fiscal policy can increase the number of jobs and can increase inflation and increase interest rates.
(It raises aggregate demand and output, lowering unemployment and pushing up the price level; greater government borrowing can push up interest rates via crowding out.)