Consider the following data for Country A and Country B.

Country A Country B

Primary Budget Surplus / GDP 2.6% 1.1%

Sovereign Debt / GDP 85% 100%

Nominal GDP Growth Rate 4% 2%

Nominal Interest Rate on Debt 7% 3%

In this scenario (Country A or Country B) is likely to see fiscal stabilization.

How will monetary policy likely change in the country that will not see stabilization?

multiple choice 2

A) The central bank will decrease interest rates.

B) No new government debt will be issued.

C) The central bank will keep interest rates stable, but increase the money supply.

D)Congress will decrease spending.