Question

John Maynard Keynes recommends active fiscal and monetary policy, so that the government can stimulate the economy when necessary. Our text observes that as a result of active fiscal policy:A. there will be stimulation of the economy in the short and long run.B. there may be stimulation of the economy in the long run, but there will be harmful effects to the economy in the short run.C. there will be harmful effects in the short and long run.D. there may be stimulation of the economy in the short run, but there will be harmful effects to the economy in the long run.

Answer 1

Result of active fiscal policy : there may be stimulation of the economy in the short run, but there will be harmful effects to the economy in the long run.

Explanation:

Active fiscal policy implies that Congress and the President are actively attempting to shift the trajectory of the economy by adjustments in taxes and/or government expenditure.

In an open market, monetary policy often influences the rate of exchange and trade balance.

Moreover, in the long term, the development of international debt, which stems from large government expenditures, can lead investors to mistrust US assets which may trigger the exchange rate to fall.