Question

5. Compare the effects of expansionary monetary and fiscal policy on the interest rate in the IS-LM model. (5 points)

Answer #1

Solution

**Effect of Fiscal Policy:**

Let us first explain how IS-LM model shows the effect of expansionary fiscal policy of increase in Government expenditure on level of national income.

This is illustrated in Increase in Government expenditure which
is of autonomous nature raises aggregate demand for goods and
services and thereby causes an outward shift in IS curve, as is
shown where increase in Government expenditure leads to the shift
in IS curve from IS_{1} to IS_{2}

**Expansionary Fiscal Policy:** **Reduction
in Taxes:**

An alternative measure of expansionary fiscal policy that may be
adopted is the reduction in taxes which through increase in
disposable income of the people raises consumption demand of the
people. As a result, cut in taxes causes a shift in the IS curve to
the right as is shown from IS_{1} to IS_{2}.

Expansionary policy consist of either monetary policy or fiscal
policy. Explain expansionary monetary policy and its effect on
Aggregat Demand (with diagram)

In your opinion, which policy, the expansionary fiscal
policy, or the expansionary monetary policy, will be more effective
to recover the U.S. economy from the current downturn by COVID-19
pandemic? Why? Please state your answer in the language of
economics.

Explain whether expansionary fiscal policy and whether
expansionary monetary policy will crowd out net exports in a
flexible exchange rate regime. Assume that the country in question
is a small country ( there is perfect capital mobility).

Compare and contrast expansionary and contractionary fiscal
policy.

explain and show with a diagram the effects of an expansionary
fiscal policy on the real exchange rate and net export

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.

In the Mundell prescription for monetary and fiscal policy under
fixed exchange rates, expansionary fiscal policy and contractionary
monetary policy would be recommended if a country were faced
with
Select one:
a. unemployment and a balance-of-payments deficit.
b. unemployment and a balance-of-payments surplus.
c. inflation and a balance-of-payments deficit.
d. inflation and a balance-of-payments surplus.

The purpose of expansionary monetary policy is to increase
the inflation rate
the GDP gap
interest rates
real GDP

Using the IS-LM model and assuming the central bank conducts
monetary policy by manipulating the cash rate, explain the effects
of:: Fiscal policy designed to offset the impact of a decrease in
the marginal propensity to consume (assuming an unchanged 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.

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