what happens when investment is perfectly elastic in case of expansionary fiscal policy?
Answers
Explanation:
A potential problem of expansionary fiscal policy is that it will lead to an increase in the size of a government's budget deficit. Higher borrowing could: Financial crowding out. Larger deficits could cause markets to fear debt default and push up interest rates on government debt.
Fiscal policy affects aggregate demand through changes in government spending and taxation. Those factors influence employment and household income, which then impact consumer spending and investment.
Increasing spending and cutting taxes to produce budget deficits means that the government is putting more money into the economy than it is taking out. Expansionary fiscal policy includes tax cuts, transfer payments, rebates and increased government spending on projects such as infrastructure improvements.
An expansionary fiscal policy, with tax cuts or spending increases, is intended to increase aggregate demand. ... This is referred to as crowding out, where government borrowing and spending results in higher interest rates, which reduces business investment and household consumption.