Purchase Solution

Selling Bonds vs. Printing New Money to Cover a Defecit

Not what you're looking for?

Ask Custom Question

Need good reliable help to answer this question

4) Suppose the government proposes to cut taxes while maintaining the
current level of government expenditures. To finance this deficit, it may either
a) sell bonds to the public, or, b) print new money (via Federal reserve cooperation).

-What are the likely effects of each of these alternatives on each of the following?
a) interest rates
b) consumer spending
c) business investment
d)aggregate demand.

Would Keynesians , monetarists, and supply-siders give the same answers?

Purchase this Solution

Solution Summary

Consumer spending questions are posed.

Solution Preview

Sell the bonds to the public:

a) Interest rates will go up. There are more bonds available in the market than the investors are willing to invest in at the current interest rate. To attract more people to the bond market, the Goverment has to increase the interest rates.

b) Consumer spending: With lower taxes, the purchasing power of people will increase so the consumer spending will increase. However at the same time, the interest rates will go up, so their will be temptation to save and invest in the bonds. So their will be a trade of for the individuals. Overall, the consumer spending will increase to a certain (part of tax savings made) extent and the savings will also incraese.

c) As the tax rates are down, the incentive to invest in the new business opportunities are ...

Purchase this Solution

Free BrainMass Quizzes
Economics, Basic Concepts, Demand-Supply-Equilibrium

The quiz tests the basic concepts of demand, supply, and equilibrium in a free market.

Economic Issues and Concepts

This quiz provides a review of the basic microeconomic concepts. Students can test their understanding of major economic issues.

Elementary Microeconomics

This quiz reviews the basic concept of supply and demand analysis.

Pricing Strategies

Discussion about various pricing techniques of profit-seeking firms.

Basics of Economics

Quiz will help you to review some basics of microeconomics and macroeconomics which are often not understood.