If the Fed is increasing its holdings of government bonds at the same time the federal deficit is increasing,
A)the Fed and the Treasury are, as usual, coordinating activities.
B)crowding out is more likely to occur.
C)the debt is being monetized.
D)the Fed is attempting to increase interest rates.

Question

Quizplus · Accepted Answer

When the Fed purchases government bonds to increase its holdings, it is also injecting money into the economy, which can lead to inflation. This is known as monetizing the debt. If this is happening simultaneously with an increase in the federal deficit, it means that the government is borrowing more money to finance its spending, and the Fed is essentially creating new money to buy that debt. This can be a concern because it can lead to a devaluation of the currency and potentially higher inflation.

If the Fed Is Increasing Its Holdings of Government Bonds