Question

If the government implements an expansionary fiscal policy, what action can the central bank take to maintain a stable interest rate

Answer 1

Buy government bond

Step-by-step explanation:

Ideally, a government would implement expansionary fiscal policy if it is aimed at making more money available in the economy. Expansionary fiscal policy includes increase in spending of governments on her projects, reduction in tax payments, tax rebates, transfer payments etc.

With regards to the above, the central bank of a country would buy government bond in order to maintain stable interest rate whilst implementing expansionary fiscal policy. The aim is to maintain a stable availability of money in the economy.