When Deciding Whether or Not to Monetize a Deficit, a Central

question 41

Multiple Choice

When deciding whether or not to monetize a deficit, a central bank faces a dilemma, since if it decides

• A)not to finance the deficit, higher interest rates may lead to the crowding out of private spending
• B) not to finance the deficit, the domestic currency may depreciate and balance of payments problems may result
• C) to finance the deficit, excessive monetary growth may lead to inflation
• D)to finance the deficit, interest rates may increase too much
• E)both A)and C)

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