Question

Does the money supply exogenously increase when Congress & The President agree to deploy stimulative fiscal policy?

Explain without using a diagram.

Answer 1

A stimulative fiscal policy means that the Congress and the President are ready to implement expansionary fiscal policy. With expansionary fiscal policy, it means that the government is ready to increase aggregate demand either by increasing government spending or through lower tax rate. To increase the spending the government need to borrow money. In order to fulfill the demand from government, the money supply can increase. There are other ways too in which fiscal policy can stimulate like reducing the income tax. With the reduction in income tax, consumers will be left with higher disposable income which on another hand will help to increase demand and will further boost the economy. Therefore, money supply exogenously does not increase if government plan to implement stimulus fiscal policy.