Assume the government cuts the level of government purchases and the Fed responds by increasing money supply.Which of the following is the most likely result?

Question

Quizplus · Accepted Answer

A reduction in government purchases can lead to a higher budget surplus due to decreased spending. When the Fed increases the money supply, it typically leads to lower interest rates as more money is available for lending. Lower interest rates can stimulate investment and consumption, not directly lead to lower tax revenues or a decrease in consumption and investment as other options suggest.

Assume the Government Cuts the Level of Government Purchases and the Fed