Suppose a cut in government spending occurs that is at least ...

[jrubin]

Suppose a cut in government spending occurs that is at least partially unexpected. Explain what effect this will have on stock prices.
 
  What will be an ideal response?

Question 2

A fiscal contraction will tend to cause which of the following to occur?
 
  A) a reduction in the interest rate and a reduction in investment
  B) a reduction in the interest rate and an upward shift in the LM curve
  C) a reduction in the interest rate and an ambiguous effect on investment
  D) no change in output if the Fed simultaneously pursues contractionary monetary policy

[CharlieArnold]

Answer to Question 1

Output falls and interest rates fall. Here, the effects are ambiguous. The drop in the interest rate will raise stock prices while the drop in Y will lower them.

Answer to Question 2

C