To "accommodate" an expansionary fiscal policy,the Fed ________ the money supply in order to hold ________ constant.
A)expands,the interest rate
B)expands,real income
C)contracts,the interest rate
D)contracts,real income

Question

Quizplus · Accepted Answer

To accommodate an expansionary fiscal policy (which increases government spending or reduces taxes), the Fed needs to expand the money supply in order to keep interest rates constant. This is because an increase in government spending or a tax cut will lead to an increase in aggregate demand, which will increase the demand for loans and put upward pressure on interest rates. By expanding the money supply, the Fed can increase the supply of loanable funds, which helps to counteract the upward pressure on interest rates and keep them from rising.

To "Accommodate" an Expansionary Fiscal Policy,the Fed ________ the Money