If a fiscal expansion is accompanied by a tight monetary policy aimed at maintaining the price level, the fiscal expansion will ____________ the government's budget balance and may __________ the public
Debt ___________ AD and Y.
A) increase; reduce; and increase
B) reduce; increase; but will not change
C) increase; increase; and increase
D) not change; not change; but will reduce

Question

Quizplus · Accepted Answer

Fiscal expansion typically involves increased government spending or tax cuts, which can lead to a larger budget deficit (reducing the government's budget balance). Tight monetary policy, such as raising interest rates, can attract investment from abroad, potentially appreciating the currency and making exports less competitive, which might not directly affect the public debt but could influence economic variables related to debt servicing and growth. The combination of fiscal expansion and tight monetary policy can increase aggregate demand (AD) and output (Y), but the impact on public debt is more complex and depends on the balance between higher interest costs and economic growth.

If a Fiscal Expansion Is Accompanied by a Tight Monetary