Suppose the Government Finances a Budget Deficit by Issuing Money

Multiple Choice

Suppose the government finances a budget deficit by issuing money (selling bonds to the Federal Reserve) . This method of finance will:

A) cause a significant decrease in investment due to higher interest rates.
B) cause aggregate demand to fall as households save more money in anticipation of higher future taxes that must eventually occur in order to repay the debt.
C) cause aggregate supply to increase due to increased investment.
D) cause a significant increase in aggregate demand because the expansionary effects of the deficit are enhanced by the expansionary effects of the increased supply of money.