Assume the federal government is reducing taxes to stimulate the economy. If the fed reduces the money supply, the effectiveness of the expansionary fiscal policy will be?

Respuesta :

If government reduces money supply, effectiveness of expansionary fiscal policy will be reduced. Recessions are treated by expansionary fiscal policy. Expanding fiscal policy involves either raising taxes or reducing spending by government.

A surplus-producing economy requires contraction. In that circumstance, a contractionary fiscal policy is best option, which would entail either raising taxes or reducing government spending. Since government spending is a part of AD, the reduction in government spending results in a reduction in total. Because lower AD will result in  new short-run equilibrium with lower output, higher unemployment rate, and lower price level, it causes  fall in output.

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