Use the Following to Answer Questions

Multiple Choice

Use the following to answer questions :
Figure: Fiscal Policy with a Fixed Money Supply
-(Figure: Fiscal Policy with a Fixed Money Supply) Look at the figure Fiscal Policy with a Fixed Money Supply. Assume that this economy is at E₁. Now government deficit spending is increased, but the Federal Reserve does NOT expand the money supply. According to this model:

A) real GDP will expand just as much as if the Federal Reserve had expanded the money supply.
B) real GDP will decrease because the Federal Reserve did not expand the money supply.
C) real GDP will expand, but not as much as if the Federal Reserve had expanded the money supply.
D) interest rates will decrease.