If government purchases increase and as a result push current output above potential output, monetary policymakers are likely to:
A) lower the real interest rate.
B) raise the real interest rate.
C) keep the real interest rate constant and focus on only changing the nominal interest rate.
D) purchase Treasury securities.

Question

Quizplus · Accepted Answer

An increase in government purchases would lead to an increase in aggregate demand, causing output to exceed potential output, resulting in inflationary pressures. In response, monetary policymakers are likely to raise the real interest rate to reduce spending and slow down the economy. By raising the real interest rate, borrowing becomes more expensive, leading to a decrease in consumer spending and investment, ultimately bringing the economy back towards the potential output level.

If Government Purchases Increase and as a Result Push Current