When the Fed uses expansionary monetary policy, which of the following is true?

Question

When the Fed uses expansionary monetary policy, which of the following is true?

a.Consumer spending and autonomous government spending increase while investment spending decreases.

b. Consumer spending, investment spending, and autonomous government spending decrease

c.Interest sensitive consumer spending, investment spending, and autonomous government spending increase

d. Interest sensitive consumer spending, investment spending, and autonomous government spending increase while net exports decreases due to the change in the value of the dollar

e. Interest sensitive consumer spending, investment spending, and autonomous government spending decrease while net exports increases due to the change in the price level

Explanation / Answer

When interest rates are low, spending increases and savings decreases. Net exports decreases because, lower interest rates mean low foreign capital inflow and more domestic money supply which will depreciate the value of dollar. Depreciated dollar is good for exports. But in value terms, net exports decreases. Answer is D.

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