The Fed increases the money supply to help offset the demand for increased funds to finance the deficit.

Question

Quizplus · Accepted Answer

When the government runs a deficit and needs to borrow more money, it puts upward pressure on interest rates. To counteract this, the Federal Reserve can increase the money supply by buying government bonds from banks, which in turn increases the banks' reserves and allows them to lend more money at lower interest rates. This can help offset the demand for increased funds to finance the deficit.

The Fed Increases the Money Supply to Help Offset the Demand