Assume an economy where the government embarks on an expansionary fiscal policy, explain the effect on equilibrium and interest rate if: a. There is a crowding out of the Private sector. b. The initial expansionary fiscal Policy was accompanied by an increase in money supply explain both senarios with the aid of diagrams

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Fiscal Policy and Money Market

Fiscal policy is one of the important tools that is used by the government to control inflation or aggregate demand in the economy. Under this policy, there are two rules which are used by the government, one is the expenditure of the government and the other is the taxation or income of the government which it collects from the public.