If the Federal Reserve takes no countervailing actions, an expansionary fiscal policy will increase the deficit, increase GDP, increase prices, and drive up interest rates.

Question

Quizplus · Accepted Answer

An expansionary fiscal policy involves increasing government spending and/or cutting taxes, which leads to an increase in aggregate demand and economic growth (GDP). However, if the Federal Reserve takes no actions to counteract this, the increase in demand may lead to inflation, pushing up prices and interest rates. Additionally, the increase in government spending will lead to an increase in the budget deficit.

If the Federal Reserve Takes No Countervailing Actions, an Expansionary