If the Federal Reserve increases the money supply at the same time as an expansionary fiscal policy drives up budget deficits,we would expect to see income _____ and interest rates ____.

Question

Quizplus · Accepted Answer

When the Federal Reserve increases the money supply, it puts more money into circulation, which leads to an increase in demand for goods and services. If an expansionary fiscal policy is also in effect, there will be an increase in government spending and a decrease in taxes, leading to an increase in aggregate demand. This boost in demand will lead to an increase in income levels. However, the increased demand may also lead to inflation, causing the central bank to raise interest rates in order to combat inflation. Therefore, income levels are expected to rise while interest rates fall.

If the Federal Reserve Increases the Money Supply at the Same