In 2010 the U.S. government was running a large deficit. Some were concerned that pressures might be put on the Federal Reserve to purchase government bonds to help the government finance this deficit. If the Fed were to buy government bonds to help the government finance its expenditures, then the price level would
A)fall, so the value of money would fall.
B)fall, so the value of money would rise.
C)rise, so the value of money would fall.
D)rise, so the value of money would rise.

Question

Quizplus · Accepted Answer

When the Federal Reserve buys government bonds, it increases the money supply in the economy, which can lead to inflation. As the price level rises, the value of money falls because each unit of currency buys fewer goods and services.