Other things equal, which of the policies will have the most expansionary effect on the economy?
A)a balanced budget
B)a budget surplus held as an idle money balance
C)a budget deficit financed by creating new money
D)a budget surplus used for debt retirement

Question

Quizplus · Accepted Answer

A budget deficit financed by creating new money will lead to an increase in the money supply and hence stimulate aggregate demand and output, resulting in an expansionary effect on the economy. The other options will not have as much of an expansionary effect, as a balanced budget would keep government spending and taxation unchanged, a budget surplus held as an idle money balance would not be used to stimulate demand, and a budget surplus used for debt retirement would also not lead to an increase in spending.

Other Things Equal, Which of the Policies Will Have the Most