Although the U.S.has a well-developed government bond market and has experienced relatively small budget deficits relative to GDP,deficits can be inflationary if

Question

Quizplus · Accepted Answer

Deficits can be inflationary if they lead to higher interest rates, which can cause prices to rise. If the Fed tries to keep interest rates from rising by printing more money and buying government bonds, this can also lead to inflation. Therefore, choice A is the best answer, as it describes a situation where deficits put upward pressure on interest rates and the Fed attempts to keep interest rates from rising.