Which of the following sets of policy changes has equivalent effects on the money supplyIn other...

Which of the following sets of policy changes has equivalent effects on the money supplyIn other words, in which option would all the changes have the same effect on the money supply?

Expert Solution

There are mainly two types of policy changes in any economy which include Fiscal policy and Monetary policy.

Fiscal policy is a tool used by government to make changes in taxes and government spending to stabilize the economy at times of economic fluctuations. Whereas the central bank of a country governs monetary policy and they make changes in interest rates to make changes in the level of money supply in the economy.

For the purpose of increasing the money supply in the economy, the central bank will lower the interest rates that will increase the borrowings in the economy. Increased borrowings and investments will lead to an increase in the money supply in the economy.

On the other hand, the same purpose of increasing the money supply can be done by the tool of fiscal policy. This can be done by increasing government spending and reducing the taxes in the economy.

Thus both the policies used in this manner can lead to an increase in money supply in the economy.

Rahul Sunny answered 2 years ago

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