Which of the following government fiscal policy actions would increase the public debt?

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BlackTom AI · Accepted Answer

Consider the question about fiscal policy actions and their effect on public debt. 
Option A: An open market sale of bonds by the Fed. This is a monetary policy action, not a fiscal one, and it reduces bank reserves rather than increasing the government's structural deficit. It does not directly create additional public debt; in fact, it can be used to tighten financial conditions. 
Option B: A balanced budget increase in spending. By definition, a balanced budget means spending equals revenue, so there is no deficit and no added debt from this scenario. The financing side matches outlays, so the public debt does not rise as a result. 
Option C: A budget deficit financed by "printing money". This approach is often described as monetizing the debt. It increases the money supply and can raise inflation pressures, but the direct mechanism of debt growth is through the central bank creating currency and buying government securities, not through the issuance of new public debt instruments. While it can indirectly affect debt dynamics, the phrasing here emphasizes money creation rather than adding new government bonds to the public debt stock. 
Option D: A budget deficit financed by issuing Treasury bonds. This is a textbook pathway to increase the public debt: the government runs a deficit and borrows by issuing Treasury securities, which adds to the outstanding national debt. The funds received from buyers are spent, but the promise to repay those bonds remains, and the debt level grows as deficits accumulate. 
Option E: None of the above. Since at least one of the options clearly describes a mechanism that increases public debt, this choice is inconsistent with the others. 
In summary, each option invites careful distinction between fiscal actions and monetary actions, and between deficits financed by borrowing versus those financed by other means. The mechanism that explicitly enlarges the national debt stock is the one where the deficit is financed by issuing government bonds rather than relying on spending cuts, tax changes, or monetary financing.

ECN 001B B01-B04 FQ 2025 Final Examination

Which of the following government fiscal policy actions would increase the public debt?

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ECN 001B B01-B04 FQ 2025 Final Examination

Which of the following government fiscal policy actions would increase the public debt?

View Explanation

Log in for full answers

Similar Questions

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Consider the following graph. Suppose the economy is currently at a point like A. Assume the central bank in this economy remains idle. What type of policy can the Government conduct to reach point B?

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More Practical Tools for Students Powered by AI Study Helper

Making Your Study Simpler

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