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Homework answers / question archive / Suppose an economy in which there are only taxes autonomous
Suppose an economy in which there are only taxes autonomous. The economic authorities are evaluating two possibilities to boost GDP in the short term. The options are to increase the money supply or increase transfers from the government. Consider that they can only do one of the two. Please indicate the correct statement. o Fiscal policy will cause a decrease in private savings and an increase in the demand for money and consumption The monetary policy will cause an increase in GDP and a decrease in the interest rate, which it will cause investment to decline and keep public finances unchanged. Assuming that both policies achieve the same result on GDP, in both cases the saving of the government remains constant. The fiscal policy will cause an increase in GDP and in the interest rate. therefore it will have an effect ambiguous in both investment and public finances.
The monetary policy will cause GDP to increase and interest rates to decline, increasing investment (due to rightward shift of the LM curve). The fiscal policy will increase GDP as well as interest rate (due to the rightward shift of the IS curve), having an ambiguous effect on investment. The correct option is the last option.
