See Hint Suppose that, during a recession, the government borrows money to provi
ID: 1108315 • Letter: S
Question
See Hint Suppose that, during a recession, the government borrows money to provide low-cost prescription medicines to poor families. Which of the following statements are correct? Choose one or more: A. Crowding-out will occur as individuals choose to rely on free medications instead of purchasing their own. B. The low-cost prescription medicines to poor families will likely raise interest rates as the government borrows more money to finance the purchase C. The government is engaging in contractionary fiscal policy. D. This policy will likely be accompanied by an impact lag as the policy takes time to make its way to the people. E. The provision of free medications is an example of an automatic stabilizer.Explanation / Answer
The government is borrowing to provide low cost prescription medicines to poor families, is an example of expansionary fiscal policy as government spending increases. This policy is not an automatic stabilizer as it involves government intervention.
The government will have to finance the spending and for that the government will increase it's borrowing from other governments or private lenders. The government will sell bond to these lenders and will have to increase interest rates in order to attract these lenders, because market are nervous about government ability to repay the debt.
Answer- option B
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