Suppose there is a monetary expansion. This monetary expansion will always cause a greater increase in output when accompanied by:
A) an increase in expected future output.
B) a decrease in expected future interest rates.
C) a decrease in expected future taxes.
D) All of the above.
E) None of the above.

Question

Quizplus · Accepted Answer

An increase in expected future output indicates that firms are expecting higher demand for their products, which will incentivize them to increase production in response to the monetary expansion. A decrease in expected future interest rates will lower the cost of borrowing, making it easier for firms to finance expansion and investment. A decrease in expected future taxes will increase the after-tax profits of firms, providing them with a greater incentive to invest and hire. Therefore, all of the above factors will lead to a greater increase in output when accompanied by a monetary expansion.

Suppose There Is a Monetary Expansion