Question

If the government initiates an expansionary monetary policy at the same time that its budget deficit increases, then the interest rate will ___________.

Answer 1

Answer:

stay the same.

Explanation:

Expansionary monetary policy means that a central bank is using its tools to manipulate the economy. It does that by increasing the money supply, aggregate demand and lowering the interest rates. This type of policy is opposite to the contractionary monetary policy.

On the other side, when government spending increases the budget deficit, the Treasury issues more bonds. This reduces the price of bonds and raise the interest rate. Or in our example, the aforementioned lower interest rate gets back to where it was. This process could lead to disruption in the economy.