Question

If the government’s budget deficit increases while the economy is producing substantially less then potential GDP and expansionary monetary policy is implemented, then any ________________ from government borrowing would be _____________________________ from that monetary policy.A. higher interest rates; largely offset by the lower interest ratesB. lower interest rates; largely offset by the higher interest ratesC. increase in interest rates; reduced by private sector investmentD. inflationary increase in price level; crowding out private investment

Answer 1

Answer:

A) higher interest rates ; largely offset by the lower interest rates

Explanation:

If the government carries on an expansionary monetary policy, it will  lower interest rates and increase the money supply in an attempt to increase aggregate demand. If at the same time it increases the interest rate it will pay for borrowing money (e.g. increase treasury bills' interest rates), that would make no sense since one policy would offset the other.

A government cannot increase the money supply and then increase the interest rates on treasury bills since that would lower the money supply again.