KEYNESIAN AND MONETARIST VIEWS ON THE EFFECTS OF EXPANSIONARY FISCAL POLICY ON REAL GROSS DOMESTIC PRODUCT AND PRICE LEVEL Real gross domestic product (GDP) and price level are determined by interactions between aggregate demand (AD) and short-run aggregate supply (SAS). In turn, consumption expenditures, investment expenditures, government expenditures, and net exports determine AD. Some of these expenditures are interest rate-sensitive. The interaction between money supply (MS) and money demand (MD) determines the interest rate.
The principal tools of fiscal policy are government-spending, taxes, and transfer payments. An expansionary fiscal policy involves (a) increased government spending, (b) decreased taxes, (c) increased transfer payments, or (d) some combination of increased government spending, decreased taxes, and increased transfer payments.
An expansionary fiscal policy has both short-term and longer
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