If the government initiates an expansionary monetary policy at the same time that its budget deficit increases, then the interest rate will _____
Answers
If the government initiates an expansionary monetary policy at the same time that its budget deficit increases, then the interest rate will increase.
Explanation:
Based Macroeconomic notion,an initial increase in money supply by the government would essentially lead to inflation in the economy or an overall rise in the average price level of all the goods and services.Now,the government can use the excess money to finance the existing budget deficit or take additional loans or credit from the central bank to finance the budgetary deficit or increase sources of government revenue through tax increase.Now,the inflation in the economy due to expansionary monetary policy by the government would eventually raise the interest rate as the money or credit lender such as banks or financial institutions would want higher future return on any loan they grant as the purchasing power or value of money has decreased due to inflation or overall rise in the price level of all the goods and services.Hence,decreased purchasing power of money in the present time would compel the financial institutions to increase the interest rate in order to ensure higher return on any financial loan in future.