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Resequence Fiscal and Monetary Policy-FOREX

Last updated 11 months ago

4 questions

1

1

1

1

Question 1

1.

Government enacts expansionary fiscal policy......

Gov-->Loanable Funds Market-->AD-->Phillips........

G is therefore borrowing more
AD decreases
Interest sensitive spending (C+I) decreases
real interest rate increases
G inc and T dec
Dlf increases since the government needs loans OR Slf decreases since the banks are lending to the government
PL decreases and Real Output decreases
UE increases

Question 2

2.

Central Bank Expansionary Monetary Policy

Central Bank-->MM-->Loanable Funds Market-->AD-->Phillips.....

PL increases and Real Output increases
Slf increases
Nominal interest rates decrease and Qm increases
AD increases
Central Bank Buys Bonds
Real interest rates decrease and Qlf increase
UE decreases
Interest sensitive spending (C+I) increases
Ms increases

Question 3

3.

Central Bank Contractionary Monetary Policy

Central Bank-->MM->Loanable Funds Market-->Investment-->Forex-->AD-->Phillips.....

$ appreciates
Slf decreases
AD decreases
Real interest rates increase and Qlf decrease
PL decreases and RGDP decreases
Central Bank Sells Bonds
UE increases
Ms decreases
US EX decreases and IM increase
NX decreases causing a current account deficit
Foreign G/S are relatively less expensive AND Domestic G/S are relatively more Expensive
S$ decreases OR D$ increases
Nominal interest rates increase and Qm decreases

Question 4

4.

Foreign Economy has an Inflationary Gap

Foreign Economy-->Forex-->Trade-->AD-->Phillips.....

$ appreciates
Foreign Economy has high PL and high DI
US AD decreases
US Nx decreases causing a Current Account deficit
US EX decreases and IM increases
PL decreases and RGDP decreases
$ can buy more foreign currency and foreign currency can buy less $
S$ decreases and D$ increases
UE increases
US G/S Relatively Less expensive and foreign G/S are relatively more expensive