Question

6. Monetizing the deficit One of the major objections to government budget deficits is that they may be inflationary. In addition, some worry that the Federal Reserve may monetize part of the deficit by buying some of the newly issued debt, potentially causing even more inflation. In general, a tax cut increases both real GDP and the price level, since it causes aggregate demand to increase. The following graph shows the demand and supply of bank reserves. Show the initial effect of this economic expansion, before any monetary policy intervention, on the market for bank reserves by shifting the demand curve, the supply curve, or both. Note: Select and drag one or both of the curves to the desired position. Curves will snap into position, so if you try to move a curve and it snaps back to its original position, just drag it a little farther. 0 Supply Demand Supply INTEREST RATE (Percent) Demand 0 600 100 200 300 400 500 QUANTITY OF BANK RESERVES (Millions of Dollars)

Answer 1

Answer:

An expansionary fiscal policy will shift the aggregate demand curve to the right as a result there will be an increase in the GDP and the interest rate.

Supply Demand Supply INTEREST RATE (Percent) Demand 0 600 100 200 300 400 500 QUANTITY OF BANK RESERVES (Millions of Dollars)

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 expansionary monetary policy , which will increase the supply Bank reserves.

The quantity of bank reserves in the economy increases only if the Fed monetizes the deficit. True.

Monetized deficits are more inflationary than non-monetized deficits-False.