1. Expansionary fiscal policy that raises the budget deficit may ____ business i
ID: 1127590 • Letter: 1
Question
1. Expansionary fiscal policy that raises the budget deficit may ____ business investment by ___ interest rates.
a. reduce, reducing
b. reduce, increasing
c. increase, increasing
d.increase, reducing
2. Classical economists interpret a large increase of expansionary monetary policy, ultimate causing inflationary pressures to build in the economy.
a. True
b. False
3. “Crowding out” is the offsetting on private expenditures caused by the government’s purchase of boths to increase the money supply
a. True
b. False
4. Federal reserve purchases of government bonds ___ total reserves and ____ the money supply
a. decreases, decreases
b. decreases, increases
c. increases, decreases
d. increases, increases
d.
Explanation / Answer
1.
An increase in the budget deficit decreases the supply of loanable fund, hence the interest rate increases. Since the interest rate increases, it leads to decrease in the investment.
An expansionary fiscal policy that raises the budget deficit may reduce business investment by increasing interest rates.
Hence the correct option is ; b. reduce, increasing
2.
According to the classical economist, the exapnsionary monetary policy has no effect for increasing the real GDP in the economy because it increases only the price level, but nothing else. It means an increase in the money supply leads to an increase in the price level, but the real income, the rate of interest and the level of real economic activity remain unaffected.
Hence the given statement is true.
3.
A crowding out can be defined as a situation when increased interest rates lead to a reduction in private investment spending and it dampens the initial increase of total investment spending.
It means it can be said that Crowding out is the offsetting on private expenditures caused by the government’s purchase of both to increase the money supply.
Hence this given statement is true.
4.
Since the Fed purchases government bond with the reserve available to Federal Reserve, hence reserve available to the Fed decreases. When the Fed, purchase bonds, the money supply increases.
Federal Reserve purchases of government bonds decreases total reserves and increases the money supply.
Hence option b;decreases; increases are correct answer,
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