Suppose that the government of a hypothetical country decides to pursue a restri

Question

Suppose that the government of a hypothetical country decides to pursue a restrictive fiscal policy such as decreasing government expenditures. This question asks you to explore the effects of such a policy ac the neoclassical school of economic thought. The following figure shows the market for loanable funds in this hypothetical country before the change in the fiscal policy is implenented REAL INTEREST RATE Supply Demand LOANABLE FUNDS Which of the following figures most closely illustrates changes in the loanable funds market after the restrictive fiscal policy is implemented? O a. REAL INTEREST RATE Supply D2 D1

Explanation / Answer

Answer is C

Neoclassical economic give importance to supply side factor but if contraction fiscal policy is followed, lead to fall the money supply this lead to rise in the interest rate. and fall in real output

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