Fiscal policy affects the real interest rate through its impact on:
A) money supply and the price level.
B) real GDP and money demand.
C) money supply and money demand.
D) real GDP and money supply.

Question

Quizplus · Accepted Answer

Fiscal policy can affect real GDP through changes in government spending and taxation, which can affect aggregate demand. Changes in real GDP can then impact money demand in the economy, since a higher GDP may lead to increased borrowing and investment. As money demand changes, the real interest rate can also be affected. However, fiscal policy does not directly affect the money supply or the price level (choice A), or the money supply alone (choice C) to impact the real interest rate.

Fiscal Policy Affects the Real Interest Rate Through Its Impact