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I believe E is the correct answer but I would appreciate a second opinion.

I believe E is the correct answer but I would appreciate a second opinion.

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Answer #1

Option (E) is correct.

Monetary policy is implemented by Central bank independently of government (fiscal) policy. A monetary expansion will increase money supply, which will reduce interest rate. Higher interest rate will increase investment and the portion of consumption demand funded by borrowing, thereby increasing aggregate demand, causing a fiscal expansion.

However, a fiscal expansion will increase budget deficit, and as government resort to borrowing, it will increase interest rate. This will not increase money supply since the decision to increase money supply is autonomously taken by Central Bank.

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