The president of Argentina, Javier Milei, announced a drastic fiscal austerity plan (“chainsaw plan”) to reduce the primary deficit quickly. The Argentinian government argues that this austerity will improve expectations, lower interest rates on government debt, and boost investment, even if it causes a short-run recession.
In which situation is this argument most likely to be valid?

Question

The president of Argentina, Javier Milei, announced a drastic fiscal austerity plan (“chainsaw plan”) to reduce the primary deficit quickly. The Argentinian government argues that this austerity will improve expectations, lower interest rates on government debt, and boost investment, even if it causes a short-run recession. 
 In which situation is this argument most likely to be valid?

Answer

The fiscal multiplier is large, and the interest rate on government debt is almost insensitive to the level of public debt.

Answer

The fiscal multiplier is negative, and the interest rate on government debt is very sensitive to the level of public debt.

Answer

The fiscal multiplier is large, and the central bank keeps the interest rate fixed regardless of debt dynamics.

Answer

The fiscal multiplier is zero, and the interest rate on government debt is completely independent of debt levels or default risk.

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The president of Argentina, Javier Milei, announced a drastic fiscal austerity p...

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