Fiscal expansion policy question?

Question

what effect does this policy have on the output, the prices and the interest rate in the short term and medium term??

Answer 1

The answer to your question is passionately debated among economists: Keynesian economists would argue that fiscal expansion (deficit spending) could actuate production.

But monetarists would argue that this stimulation would not outrun the side-effects that "crowd out" private investment: first, it would increase the demand for labor and raise wages, hurting profitability; Second, a government deficit increases the stock of government bonds, reducing their market price and encouraging high interest rates, making it more expensive for business to finance fixed investment. Thus, efforts to stimulate the economy would be self-defeating.