Irresponsible fiscal policy creates a problem for the central bank, since it may be
A)blamed for slowing economic growth if it refuses to money-finance increased government spending
B)blamed for higher inflation if it money-finances increased government spending
C)forced to sell too many government securities
D)forced to lower interest rates by open market sales
E)both A)and B)

Question

Quizplus · Accepted Answer

Irresponsible fiscal policy can create a problem for the central bank because if the bank refuses to finance increased government spending, it may be blamed for slowing economic growth. On the other hand, if the central bank decides to money-finance the spending, it may cause inflation, which will again lead to criticism of the central bank. Thus, both options A) and B) apply in this scenario.

Irresponsible Fiscal Policy Creates a Problem for the Central Bank