Understanding Policy Mix Effects on Investment

**Policy Mix in Economics** Fiscal and monetary policies don't operate independently.

They should work together, but they have opposite effects on interest rates,

creating complex interactions. **Key Interest Rate Effects:** - Expansionary fiscal

policy increases real interest rates - Contractionary fiscal policy decreases real interest rates

- Expansionary monetary policy decreases both nominal and real interest rates - Contractionary

monetary policy increases both types of interest rates **Four Policy Mix Scenarios:**

**Both Expansionary:** Aggregate demand, GDP, and price levels rise while unemployment

falls. Interest rate effects cancel out, making investment demand indeterminate.