If the Federal Reserve does not counteract this expansionary fiscal policy, the

Question

If the Federal Reserve does not counteract this expansionary fiscal policy, the interest rate will (increase/decrease) . To prevent this from occurring, the Fed can engage in (contractionary monetary policy/expansionary monetary policy) , which will (decrease/increase) the (supply of/the demand for) bank reserves. (Note: Do not illustrate this reaction by the Fed on the preceding graph.)

The following table lists two statements about the effects of the Fed monetization of the deficit. Indicate whether each statement is True or False in the table.

Monetized deficits are more inflationary than nonmonetized deficits. True/False

The interest rate rises to 4% when the Fed monetizes the deficit. True/ False

Explanation / Answer

If the Federal Reserve does not counteract this expansionary fiscal policy, the interest rate will increase . To prevent this from occurring, the Fed can engage in (contractionary monetary policy, which will (decrease) the (supply of bank reserves

1. True

2, Graph n't available to answer this Question

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