If a 200 billion dollar increase in government spending occurs when the Fed seeks to maintain a fixed interest rate then
A)there is no crowding out,the LM curve shifts to offset the shift in the IS curve.
B)there is no crowding out,the monetary policy is fixes as is the LM curve fixed.
C)crowding out is assured since monetary policy is fixed.
D)crowding out is assured since the Fed will accommodate the spending increases.

Question

Quizplus · Accepted Answer

If the Fed seeks to maintain a fixed interest rate, it will adjust the money supply to offset any increase in government spending in order to maintain the interest rate target. This will shift the LM curve, resulting in no crowding out.

If a 200 Billion Dollar Increase in Government Spending Occurs