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 an increase in government borrowing to finance expansionary fiscal policy will increase the demand for loanable funds, pushing up interest rates. This, in turn, will crowd out private investment spending as businesses find it more expensive to borrow and invest, leading to a decrease in overall economic growth. Tightening monetary policy (choice A) may be a result of increased inflationary pressure because of increased government spending, but that is not inherent to financing through borrowing. The demand for money and interest rates may actually increase (not decrease) when the government borrows, as explained above, making choice C incorrect. Finally, choice D is incorrect because there is no direct relationship between government borrowing and the shape of the investment demand curve.

Monetarists Argue That When Expansionary Fiscal Policy Is Financed Through