What's wrong with the following statement? Whenever fiscal policy makers increase the budget deficit, monetary policy makers should increase the money supply in order to maintain a low, stable rate of inflation.© BrainMass Inc. brainmass.com March 4, 2021, 9:34 pm ad1c9bdddf
If the budget deficit is increasing and the central bank decides to increase money supply it will have two effects. One increasing budget deficit implies that the government spending is rising: and hence AD is rising. Now depending on where the economy is to begin with, the central bank will either have to raise or lower interest rates.
The solution examines the nuanced relation between fiscal and monetary policies and shows how they should be used as complements and not substitutes.