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Resequence Fiscal and Monetary Policy-FOREX

Last updated 9 months ago
4 questions
1

Government enacts expansionary fiscal policy......

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

  1. Dlf increases since the government needs loans OR Slf decreases since the banks are lending to the government
  2. AD decreases
  3. Interest sensitive spending (C+I) decreases
  4. real interest rate increases
  5. G is therefore borrowing more
  6. UE increases
  7. G inc and T dec
  8. PL decreases and Real Output decreases
1

Central Bank Expansionary Monetary Policy

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

  1. UE decreases
  2. AD increases
  3. Interest sensitive spending (C+I) increases
  4. Slf increases
  5. Ms increases
  6. Central Bank Buys Bonds
  7. PL increases and Real Output increases
  8. Real interest rates decrease and Qlf increase
  9. Nominal interest rates decrease and Qm increases
1

Central Bank Contractionary Monetary Policy

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

  1. Nominal interest rates increase and Qm decreases
  2. Foreign G/S are relatively less expensive AND Domestic G/S are relatively more Expensive
  3. NX decreases causing a current account deficit
  4. Ms decreases
  5. Slf decreases
  6. UE increases
  7. US EX decreases and IM increase
  8. AD decreases
  9. $ appreciates
  10. Central Bank Sells Bonds
  11. Real interest rates increase and Qlf decrease
  12. PL decreases and RGDP decreases
  13. S$ decreases OR D$ increases
1

Foreign Economy has an Inflationary Gap

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

  1. $ can buy more foreign currency and foreign currency can buy less $
  2. US EX decreases and IM increases
  3. $ appreciates
  4. Foreign Economy has high PL and high DI
  5. PL decreases and RGDP decreases
  6. US G/S Relatively Less expensive and foreign G/S are relatively more expensive
  7. US AD decreases
  8. UE increases
  9. US Nx decreases causing a Current Account deficit
  10. S$ decreases and D$ increases