22. If the Federal Reserve sells bonds in the open market at the same time as th

Question

22. If the Federal Reserve sells bonds in the open market at the same time as the government increases government spending, theeffect of the fiscal policy will be A. expansionary; heightened B. contractionary; heightened C. expansionary; diminished D. contractionary; diminished 23. If the Rederal Reserve accommodates a fiscal expansion by increasing the money supply that the interest rate increases, but only a little, then the crowding-out effect will: A. be zero. B. decrease, but still be positive. C. increase. D. become infinitely large.

Explanation / Answer

22. C) Expansionary; diminished

Increase in government spending means expansionary fiscal policy. This causes increase in money supply but if at the same time Fed sells government securities then it causes decrease in MS. So, net effect of expansionary fiscal policy will be diminished.

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