Question

What policy mix of monetary and fiscal policy is needed to meet the following objectives? Illustrate...

What policy mix of monetary and fiscal policy is needed to meet the following objectives? Illustrate using IS-LM diagrams.

a.       Increase Y while keeping the interest rate constant. Explain what the CB has to do to keep the interest rate constant. Would investment change?

b.       Decrease a fiscal deficit while keeping Y constant. Why must the interest rate also change?

Business   Economics   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

a) Increase output while keeping the interest rate constant will need to increase the autonomous expenditure i.e. government expenditure and adopt a deficit budget. This will increase the interest rate in the economy, To keep the interest constant at the earlier level the CB need to adopt an easy money policy. Yes, investment in the economy will increase because of increased demand.

b) To decrease the fiscal deficit while keeping the output constant the government need to decrease the expenditure i.e. shift the IS curve to the left and the central bank needs to decrease the interest rates to increase the output and investment. This will shift the LM curve to the right.

  

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Using the IS-LM-AD-AS model illustrate the appropriate monetary-fiscal policy mix for an economy experiencing a substantial...
Using the IS-LM-AD-AS model illustrate the appropriate monetary-fiscal policy mix for an economy experiencing a substantial fall in GDP, rising unemployment and a falling price level.
Suppose that in a closed economy the fiscal policy is contractionary and monetary policy is expansionary,...
Suppose that in a closed economy the fiscal policy is contractionary and monetary policy is expansionary, and the central bank is setting the interest rates (LM is horizontal). Graphically analyze this policy mix by using IS-LM diagram. What will be the impact on real income and on interest rate in the short run? What will be the impact of this policy mix on the economy in the medium run? Show by using an AD-AS-LRAS diagram.
According to the IS-LM model, which of the following statements is true? a. Contractionary monetary policy...
According to the IS-LM model, which of the following statements is true? a. Contractionary monetary policy tends to decrease GDP and decrease the interest rate. b. An increase in government expenditure tends to increase GDP and increase the interest rate. c. Expansionary monetary policy reduces the monetary base in the economy. d. None of the above.
What happens when there is an expansionary monetary policy under a flexible exchange rate regime to...
What happens when there is an expansionary monetary policy under a flexible exchange rate regime to the exchange rate, interest rate, consumption, investment, and net exports? Be sure to include the IS-LM-UIP diagrams in your answer.
. Which of the following are concerns regarding expansionary fiscal policy, i.e. the increase in government...
. Which of the following are concerns regarding expansionary fiscal policy, i.e. the increase in government spending and decreases in taxes a. it will decrease wages b. It will create an asset bubble c. it will cause deflation d. It will increase budget deficits and the national debt 2. Savings Accounts are part of which stock of money? a. M2 b. Monetary base c. All of the above d. M1 3. The main goal of monetary policy is to a....
8. In the early 1980s, the Reagan administration had very tight monetary policy (decrease in money...
8. In the early 1980s, the Reagan administration had very tight monetary policy (decrease in money supply), a big tax cut, and a big increase in government spending. The net effect was an increase in aggregate demand.                                                                 [15 points]                   a. Use well labeled diagrams for the Keynesian cross (aggregate demand and supply) money market, FX market, and IS-LM curves to show what happened to the nominal interest rate, the exchange rate, consumption, investment, government spending, and net exports. b....
For each of the following situations, use the IS-LM-FX model to illustrate the effects of the...
For each of the following situations, use the IS-LM-FX model to illustrate the effects of the shock. Please explain how you obtained your answer (do not just state the effect). For each case, state the effect of the shock on the following variables (increase, decrease, no change, or ambiguous): Y, i, E, C, I and TB. Assume the government allows the exchange rate to float and makes no policy response. 1. The money supply increases. 2. Government spending increases. 3....
For each of the following situations, use the IS-LM-FX model to illustrate the effects of the...
For each of the following situations, use the IS-LM-FX model to illustrate the effects of the shock. Please explain how you obtained your answer (do not just state the effect). For each case, state the effect of the shock on the following variables (increase, decrease, no change, or ambiguous): Y, i, E, C, I and TB. Assume the government allows the exchange rate to float and makes no policy response. 1. The money supply increases. 2. Government spending increases. 3....
What can we say about which type of policy, fiscal or monetary, once enacted affects the...
What can we say about which type of policy, fiscal or monetary, once enacted affects the economy more quickly? Select one: A. The lag between a change in fiscal policy and its effect on output tends to be shorter. B. Changes in monetary policy normally take effect on the economy with little or no lag. C. They both take the same amount of time to take effect. D. It is impossible to tell how long either policy will take to...
a. Monetary Policy involves changing taxes and government spending/ the design of currency/ exports/ the money...
a. Monetary Policy involves changing taxes and government spending/ the design of currency/ exports/ the money supply.   In the United States, Monetary Policy is implemented by the Federal Reserve/ President and Congress/ Secretary of the Treasury/ states. b. Contractionary Monetary Policy/ Lower prices/ Expansionary MonetaryPolicy/ Larger coins can be used to address a Recessionary Gap; while Expansionary MonetaryPolicy/ smaller coins/ Contractionary Monetary Policy/ higher prices can be used to address an Inflationary Gap. c.  To enact Contractionary Monetary Policy, the central bank...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT