ECONOMICS
FISCAL POLICY
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Increase in MPC
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Lower interest rates decrease net exports
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Higher interest rates increase net exports
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higher interest rates decrease private investment
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Detailed explanation-1: -Answer and Explanation: Ans: Higher interest rates that decrease private investment.
Detailed explanation-2: -However, expansionary fiscal policy can result in rising interest rates, growing trade deficits, and accelerating inflation, particularly if applied during healthy economic expansions. These side effects from expansionary fiscal policy tend to partly offset its stimulative effects.
Detailed explanation-3: -If the government reduces its expenditures and thereby reduces its borrowing, the supply of available funds in the credit market increases, causing the interest rate to fall.
Detailed explanation-4: -The crowding out effect theory suggests that rising public sector spending drives down private sector spending. To spend more, the government needs more revenue, which it gets through higher taxes and/or sales of Treasuries. This can reduce private sector income and loan demand, thus decreasing spending and borrowing.