What role does the Fed play in our national debt and federal deficit? Does government borrowing...

What role does the Fed play in our national debt and federal deficit?

Does government borrowing crowd out private-sector spending? Explain.

Expert Solution

Answer:
Role played by Fed in our national debt and federal deficit are mentioned below:

During recession Fed uses expansionary monetary policy to increase the money supply in the economy. It also reduces the interest rate and increases number of loans in the economy. Because of all these national debt is increased to fund all the initiatives. Federal deficit also increases because of negative balance of trade in this scenario.
During inflation Fed uses Contractionary monetary policy to decrease the money supply in the economy. It also increases the interest rate and decreases number of loans in the economy because of which federal deficit as well as national debt decreases.

Yes government borrowing crowd out private sector spending. This happens since when the government takes up the lion's share of reserves accessible within the banking framework, less of it is cleared out for private borrowers.

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Rahul Sunny answered 1 year ago

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