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

According to monetarist theory, an expansionary fiscal policy (i.e. government spending increases) would lead to an increase in the money supply and ultimately inflation. To combat this, the Federal Reserve would sell government securities, which would reduce the money supply and increase interest rates. This would ultimately offset the initial increase in aggregate demand from the expansionary fiscal policy. Therefore, the correct choice is B, the selling of government securities by the Treasury.

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