Suppose the federal deficit increased sharply from one year to the next,and the Federal Reserve kept the money supply constant.Other things held constant,we would expect to see interest rates decline.

Question

Quizplus · Accepted Answer

The statement is incorrect. If the federal deficit increases sharply and the Federal Reserve keeps the money supply constant, it may lead to inflationary pressures. In this case, the demand for credit increases, which pushes up interest rates, not lower them.

Suppose the Federal Deficit Increased Sharply from One Year to the Next,and