Suppose the Government Finances a Budget Deficit by Issuing Money

question 84

Multiple Choice

Suppose the government finances a budget deficit by issuing money (selling bonds to the Federal Reserve) . This method of finance will:

• A) cause a significant decrease in investment due to higher interest rates.
• B) cause aggregate demand to fall as households save more money in anticipation of higher future taxes that must eventually occur in order to repay the debt.
• C) cause aggregate supply to increase due to increased investment.
• D) cause a significant increase in aggregate demand because the expansionary effects of the deficit are enhanced by the expansionary effects of the increased supply of money.

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