1.In class we talked about three ways of financing government expenditures.

1) Selling government bonds to the public to finance the deficit

2) Raising taxes.

3) "Printing money" (or monetizing the debt) by having the Fed buy the governmentbonds on the open market.

Suppose a candidate for president argues the (1) is not acceptable because of the "crowding-out" effect and instead the U.S. should persue (3) and just "print money" to cover the government's budget deficit. Explain the advantages and disadvantages of such a plan by answering the following questions?

a) Explain what is meant by the "crowding-out effect" if the government sells bonds in the loanable funds market.

b) If, instead of selling bonds to the public, the government sold bonds to the Fed, what would happen to the money supply? Explain

c) What are the advantages and disadvantages of the plan in (b) over (a)?