Ceteris paribus, the fiscal multiplier increases if commercial banks tighten their lending.

Question

identify the statement as True, False, or Uncertain, and explain your reasoning (in total of not more than 150 words). The maximum marks for each question will be given for a full and correct explanation. You may use written, diagrammatic, and mathematical arguments as appropriate.

Answer 1

False, commercial lenders (banks) and their activities only impact monetary policy. Fiscal policy is a function of a legislative or executive governmental body (in the US, Congress, and the President). Fiscal policy changes are changes to government spending and taxation.

A way to correct this statement would be to state that the monetary policy, money multiplier would decrease if commercial banks tighten their lending.