Question

The growth rate of real GDP in the country of West Prasia was very low last year. The government was unable to you is expenses with the revenue generated during the year A committee was appointed to suggest appropriate poly measures to boost economic growth some of the committee members were of the opinion that an expansionary focal policy alone should be able to increase agregate demand and put y Other members of the committee, however, desagreed. According to the expansionary fiscales may ulice and the should consider monetary policy measures the specially when the government already has a hel delica The govement of West Puas decided that they would increase government spending considerably to boost pregate demand in the economy The government planned and implemented a series of nationwide programs aimed at increasing output and employment A review of the impact of the gegevent spending showed that the increase in aggregate demand was much larger than anticipated Which of the following true, would explain this outcome? O A Compared to other neighboring countries, the West Prasan economy is relatively small OB Interest rates in West Prasia we still lower than in most other countries OC. The government had to be bonds in order to finance the increased spending OD Government spending on foreign and increased as a boring country was hit by a severe earthquake OE. The net capital inflow increased this year

Answer 1

It has been stated that during the year, the government has find it tough to fully meet its expenses as its revenue is very low. Also, the growth rate of the economy is also very low

In such scenario, government has decided to administer expansionary fiscal policy and has decided to increase the government spending in considerable manner.

Since, government does not have sufficient revenue to meet its expenses during the year, it has to borrow in order to undertake the huge government spending it wants to undertake.

As government will resort to borrowing, the demand for loanable funds will increase and the interest rate in economy will also increase.

This increase in interest rate will induce the foreign investors to invest fund in West Pruasia.

Thus, the net capital inflow will increase during the year. This will increase the liquidity in the system and would boost investment and consumption leading to more than anticipated increase in aggregate demand.

Hence, the correct answer is the option (E) [The net capital inflow increased this year].