Monetarists argue that when expansionary ﬁscal policy is ﬁnanced through borrowing,
A) monetary policy becomes tight.
B) private investment spending will be crowded out.
C) the demand for money and interest rates both decrease.
D) the investment demand curve becomes relatively steep.

Question

Quizplus · Accepted Answer

Monetarists believe that expansionary fiscal policy, when financed through borrowing, increases the demand for credit and interest rates, which leads to crowding out, meaning that private investment spending is reduced or crowded out by government borrowing. This is because borrowing by the government increases the demand for credit, which leads to higher interest rates, and hence, reduces the funds available for private sector investment, which is sensitive to the cost of borrowing.

Monetarists Argue That When Expansionary ﬁScal Policy Is ﬁNanced Through