In 2010 the U.S.government was running a large deficit.Some were concerned that pressures might be put on the Federal Reserve to purchase government bonds to help the government finance this deficit.If the Fed were to buy government bonds to help the government finance its expenditures,then
A)the price level would fall,so the value of money would fall.
B)the price level would fall,so the value of money would rise.
C)the price level would rise,so the value of money would fall.
D)the price level would rise,so the value of money would rise.

Question

Quizplus · Accepted Answer

When the Fed buys government bonds, it increases the money supply, which results in an increase in aggregate demand. This, in turn, leads to an increase in prices. Therefore, the price level would rise, causing the value of money to fall.