Figure 16-3

-Figure 16-3 shows the impact of deficit spending and the corresponding economic expansion on the demand curve for money.If the Federal Reserve does not want interest rates to rise, it will
A)shift the money supply curve to the right by monetizing the deficit.
B)shift the money supply curve to the left by open market sales of government securities.
C)maintain the current targets for both M1 and M2 money stocks.
D)engage in contractionary monetary policy, such as increases in the discount rate.

Question

Figure 16-3
 
-Figure 16-3 shows the impact of deficit spending and the corresponding economic expansion on the demand curve for money.If the Federal Reserve does not want interest rates to rise, it will
A)shift the money supply curve to the right by monetizing the deficit. 
B)shift the money supply curve to the left by open market sales of government securities. 
C)maintain the current targets for both M1 and M2 money stocks. 
D)engage in contractionary monetary policy, such as increases in the discount rate.

Quizplus · Accepted Answer

Deficit spending and economic expansion shift the demand curve for money to the right, causing interest rates to rise. To prevent this from happening, the Federal Reserve can shift the money supply curve to the right by monetizing the deficit, which increases the supply of money, lowers interest rates, and helps to stimulate economic growth. This is the most effective way for the Federal Reserve to maintain interest rates at their desired levels.

Figure 16-3 -Figure 16-3 Shows the Impact of Deficit Spending and the Deficit