Federal government deficit financing may have a very great influence on monetary and credit conditions. Explain.

Expert Solution

Federal government deficit financing occurs when the government spends more than it's sources of revenue, and Government deficit occurs when expenditures are greater than revenues then government must compete with other borrowers in the financial system.

At a time of Federal government deficit, when demand of funds are more, government may provide additional funds or credit by applying various measures of monetary policy like purchase of government securities, reducing the reserve requirement and by reducing the bank rate to provide more credit to the public

To keep the government spending into equilibrium , the Fed may increase the supply of money supply to offset the demand for increased funds to finance the deficit

When deficit is low then shortage can be fulfilled with the bank reserves while deficit is large then fed government may use monetary and credit measures to over the problem.

jeff jeffy answered 1 year ago

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Question

Federal government deficit financing may have a very great influence on monetary and credit conditions. Explain.

Solutions

Expert Solution

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