Suppose that the United Kingdom pegs the pound to the euro and the European Central Bank decides to use monetary policy to offset the possible inflationary effects of European expansionary fiscal policy. How would the European Central Bank's monetary policy affect European interest rates?
A) They would rise.
B) They would fall.
C) The combination of the expansionary fiscal policy and the monetary policy would cause interest rates to return to their level prior to the expansionary fiscal policy.
D) The combination of the expansionary fiscal policy and the monetary policy would not affect interest rates.

Question

Quizplus · Accepted Answer

To offset the inflationary effects of expansionary fiscal policy, the European Central Bank would likely tighten monetary policy, which typically involves increasing interest rates to reduce inflationary pressure.

Suppose That the United Kingdom Pegs the Pound to the Euro