Suppose that government purchases increase and that the Fed acts to prevent any change in the U.S.exchange rate.This action necessarily requires

Question

Quizplus · Accepted Answer

When government purchases increase, there is a higher demand for goods and services, which can lead to inflation. To prevent this inflation, the Fed may increase the money supply by buying bonds or reducing the reserve requirement for banks. This increase in the money supply would help keep interest rates low and prevent the exchange rate from changing.

Suppose That Government Purchases Increase and That the Fed Acts