Answer to Question #175238 in Macroeconomics for econcode

Question

What will happen if the central bank responds to the increase in government expenditure by an accommodating monetary policy? Substantiate your answer with proper and completer chain of logic and well-labeled diagrams

Answer 1

When the accomodative monetary policy expands this will help in meeting the government expenditure. However there will be negative repercussions in the long term. When the supply of money is loosened for a long duration, there will be much money chasing less goods and services that may lead to inflation. This results to increased costs of some goods like housing.