Question

Suppose there is a Fed purchase of bonds and simultaneous tax cut. We know with certainty that this combination of policies must cause:

Answer 1

Answer:

Expansionary monetary policy

Expansionary fiscal policy

Explanation:

Expansionary monetary policy are policies taken by the Fed to increase money supply in the economy.  the tools used in Expansionary monetary policy are :

1. reducing required reserves ratio

2. open market purchase.

When the Fed purchase of bonds, money supply increases

Expansionary fiscal policy are policies taken by the government to increase money supply in the economy.  the tools used in Expansionary monetary policy are :

1. tax cuts which increases disposable income

2. increased government spending