According to monetarists, an expansionary ﬁscal policy is a weak stabilization tool because
A) the asset demand for money varies inversely with the rate of interest.
B) government borrowing to ﬁnance a deﬁcit will raise the interest rate and reduce private investment.
C) government borrowing will reduce the supply of money in circulation and depress the GDP.
D) government borrowing to ﬁnance a deﬁcit will lower interest rates, increase money balances, and lower velocity.

Question

Quizplus · Accepted Answer

According to monetarists, an expansionary fiscal policy is a weak stabilization tool because government borrowing to finance a deficit will raise interest rates and reduce private investment. This is because when the government borrows money, it competes with private borrowers for available funds, leading to an increase in interest rates. Higher interest rates make borrowing more expensive for private firms, reducing their investment and potentially slowing down economic growth.

According to Monetarists, an Expansionary ﬁScal Policy Is a Weak