Under a fixed exchange-rate system, as a government adopts an expansionary fiscal policy:
A) the demand for loanable funds increases causing interest rates to rise.
B) the demand for loanable funds decreases causing interest rates to fall.
C) the supply of loanable funds increases causing interest rates to rise.
D) the supply of loanable funds decreases causing interest rates to fall.
E) the demand for loanable funds does not change and interest rates fall.

Question

Quizplus · Accepted Answer

Under a fixed exchange-rate system, when a government adopts an expansionary fiscal policy, it typically increases government spending or decreases taxes, which boosts aggregate demand. This leads to an increased demand for loanable funds as businesses seek to invest more to meet the higher demand for their products and the government may need to borrow to finance its deficit, causing interest rates to rise.

Under a Fixed Exchange-Rate System, as a Government Adopts an Expansionary