From a monetarist perspective, an expansionary ﬁscal policy's effect on aggregate demand would be offset by
A) the buying of government securities by the Treasury.
B) the selling of government securities by the Treasury.
C) a cut in the Federal funds rate.
D) a cut in the discount rate.

Question

Quizplus · Accepted Answer

Monetarists believe that the level of aggregate demand is determined by the money supply. Therefore, an expansionary fiscal policy that increases government spending and/or decreases taxes would increase the demand for money, leading to higher interest rates. The Treasury can counteract this effect by selling government securities, which would decrease the money supply and lower interest rates, offsetting the initial expansionary impact of the fiscal policy.

From a Monetarist Perspective, an Expansionary ﬁScal Policy's Effect on Aggregate