Government enacts expansionary fiscal policy......
Gov-->Loanable Funds Market-->AD-->Phillips........
AD decreases
Interest sensitive spending (C+I) decreases
UE increases
real interest rate increases
PL decreases and Real Output decreases
Dlf increases since the government needs loans OR Slf decreases since the banks are lending to the government
G inc and T dec
G is therefore borrowing more
Central Bank Expansionary Monetary Policy
Central Bank-->MM-->Loanable Funds Market-->AD-->Phillips.....
Real interest rates decrease and Qlf increase
PL increases and Real Output increases
Interest sensitive spending (C+I) increases
UE decreases
Ms increases
AD increases
Nominal interest rates decrease and Qm increases
Central Bank Buys Bonds
Slf increases
Central Bank Contractionary Monetary Policy
Central Bank-->MM->Loanable Funds Market-->Investment-->Forex-->AD-->Phillips.....
Foreign G/S are relatively less expensive AND Domestic G/S are relatively more Expensive
Ms decreases
Central Bank Sells Bonds
$ appreciates
US EX decreases and IM increase
Slf decreases
AD decreases
Real interest rates increase and Qlf decrease
Nominal interest rates increase and Qm decreases
UE increases
NX decreases causing a current account deficit
S$ decreases OR D$ increases
PL decreases and RGDP decreases
Foreign Economy has an Inflationary Gap
Foreign Economy-->Forex-->Trade-->AD-->Phillips.....
$ can buy more foreign currency and foreign currency can buy less $
US EX decreases and IM increases
UE increases
US AD decreases
Foreign Economy has high PL and high DI
$ appreciates
S$ decreases and D$ increases
US G/S Relatively Less expensive and foreign G/S are relatively more expensive
PL decreases and RGDP decreases
US Nx decreases causing a Current Account deficit