Question

According to what we did on fiscal policy in class, if the federal government is spending more than it takes in in revenue (basically taxes they collect), what is the U.S. Treasury most likely to do?

a.raise taxes

b.cut taxes

c.raise government spending

d.cut government spending

e.borrow from the public by selling bonds to investors

f.lend to the public by buying bonds from investors

g.increase the amount of money in the economy (basically "print" money)

h.decrease the amount of money in the economy (basically "recall" money)

Answer 1

When the Federal government is spending more than it takes in revenue than it is said that federal government is having a budget deficit.

When federal government has budget deficit, it generally need resources to bridge the gap between expenditure and revenue.

In such scenario, US Treasury sell bonds in order to raise necessary amount to bridge the gap between expenditure and revenue.

So,

The US Treasury is most likely to borrow funds from public by selling bonds to investors.

Hence,

The correct answer is the option (e).