Suppose real output is at the potential level. Further assume that the federal government decides that...

Suppose real output is at the potential level. Further assume that the federal government decides that the current budget deficit is too high and passes a change in policy to eliminate the deficit. Everything else held constant, if the central bank enacts counter-cyclical policy, it will ______real interest rates. If the central bank does nothing, the inflation rate will ______, everything held constant.

a. decrease, decrease

b. increase, increase

c. increase, decrease.

d. decrease, increase

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Expert Solution

Answer)

Suppose real output is at the potential level. Further assume that the federal government decides that the current budget deficit is too high and passes a change in policy to eliminate the deficit. Everything else held constant, if the central bank enacts counter-cyclical policy, it will __ decrease _real interest rates. If the central bank does nothing, the inflation rate will __ decrease____, everything held constant.

A) decrease, decrease

We know that when rate of interest is decreasing it will boost the level investment and the investment in turn will too some extent decrease the inflation rate when more more is devoted to investment. Less money will be available for consumption. In order to curtail the budget deficit the rate of interest and the inflation should be decreased.

The option, A is right decrease, decrease. I thanks you for coperating. Im sory i told you its answer is increase, increase. Actually that time i confused that is why...

Hope you got your answer thank you

Rahul Sunny answered 1 year ago

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