Question

king thranduil of the woodland realm is trying to rescue the kingdom from a severe recession by engaging in expansionary fiscal policy. as a result of the expansionary fiscal policy, the woodland realm now has a budget deficit. meanwhile, the president of the central bank is smaug, who wants to maintain a steady interest rate. what is the appropriate action for the central bank to take in order to reduce the impact of the expansionary fiscal policy on interest rates? choose 1 answer: a sell bonds b buy bonds c increase taxes d decrease taxes e increase the reserve requirement

Explanation:

Expansionary fiscal policy can increase interest - rates due to higher demand for loanable funds. To maintain steady interest rates, the central bank needs to increase the money supply. Buying bonds injects money into the economy, increasing the money supply.

Answer:

B. Buy bonds