In an economy where there are unemployed resources, the marginal propensity to consume is 0.2. The government raises its budget deficit and covers it by selling bonds to the non-bank private sector. What is the most likely result?
- AThe currency will depreciate, increasing exports and reducing the trade deficit.
- BThe increase in real output will be limited as the value of the multiplier is low.
- CThe money supply will fall, leading to a reduction in aggregate demand.
- DThere will be a decrease in the rate of interest, causing demand-pull inflation.