The Effects of Expansionary Fiscal Policy

The short-term tacks of an expansionary fiscal form _or_ system of regime are (a) an improver in AD, which leads to (b) an increase in GDP (y) and (c) an increase in the price level. Very soon, however, the increase in GDP results in an increase in MD, which, in turn, leads to an increase in the engage rate. The increase in the interest rate leads to a lessening in interest rate-sensitive expenditures. Thus, the initial increase in GDP caused by the expansionary fiscal constitution is moderated to some extent. In the short-term, however, an expansionary fiscal insurance policy caused both genuine GDP and the price level to increase.

An expansionary fiscal policy, however, also has an effect on investment expenditures. This effect is the process of crowding-out, which causes a reduction in investment expenditures. Crowding-out occurs when fiscal policy affects interest-sensitive expenditures. When an expansionary fiscal policy incre

ses the demand for money time increases in the price level reduce the real time value of money, interest rates increase.

Thus, the increased activity by government crowds-out investment expenditures because of the increased interest rates required to adjudge investment capital.

Keynesian economists hold that (a) the prudence is inherently wobbly and (b) fiscal policy is more effective than is monetary policy because an expansionary fiscal policy can be structured to defame the crowding-out of investment expenditures. Monetarist economists reject the Keynesian argument, holding instead that (a) the economy is inherently static and (b) monetary policy is more stable because fiscal policy always causes too oftentimes crowding-out of investment. In part, the disagreement between the Keynesians and the monetarists revolves around the issue of what constitutes "too much crowding-out" of investment expenditures. Keynesians view
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