Question

In the long-run, an increase in the budget deficit and an expansionary monetary policy would:
a. increase the price level only.
b. increase both the price level and real income.
c. increase real income only.
d. None of these

Answer 1

With the increase in the budget deficit and the expansionary monetary policy, the price level will also increase.

Answer: Option A

Explanation:

Budget deficit is when the expenditure of the government is more than the revenue earned by the government. Expansionary monetary policy is that policy with which the supply of the money in the economy increases.

With both these increasing, the effect would be increase in the demand of the people for the goods and the services. This will lead to increase in the level of prices in the economy if the supply of the goods and services does not increase.