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Resequence Fiscal and Monetary Policy-FOREX
By Michael Burbine
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Last updated about 1 year ago
4 questions
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Question 1
1.
Government enacts expansionary fiscal policy......
Gov-->Loanable Funds Market-->AD-->Phillips........
AD decreases
G inc and T dec
UE increases
Dlf increases since the government needs loans OR Slf decreases since the banks are lending to the government
G is therefore borrowing more
Question 2
2.
Central Bank Expansionary Monetary Policy
Central Bank-->MM-->Loanable Funds Market-->AD-->Phillips.....
Real interest rates decrease and Qlf increase
Interest sensitive spending (C+I) increases
AD increases
Nominal interest rates decrease and Qm increases
Question 3
3.
Central Bank Contractionary Monetary Policy
Central Bank-->MM->Loanable Funds Market-->Investment-->Forex-->AD-->Phillips.....
Question 4
4.
Foreign Economy has an Inflationary Gap
Foreign Economy-->Forex-->Trade-->AD-->Phillips.....
US AD decreases
$ can buy more foreign currency and foreign currency can buy less $
UE increases
Interest sensitive spending (C+I) decreases
real interest rate increases
PL decreases and Real Output decreases
Slf increases
Ms increases
Central Bank Buys Bonds
UE decreases
PL increases and Real Output increases
Central Bank Sells Bonds
UE increases
Real interest rates increase and Qlf decrease
PL decreases and RGDP decreases
Slf decreases
Nominal interest rates increase and Qm decreases
AD decreases
$ appreciates
NX decreases causing a current account deficit
Ms decreases
Foreign G/S are relatively less expensive AND Domestic G/S are relatively more Expensive
US EX decreases and IM increase
S$ decreases OR D$ increases
US Nx decreases causing a Current Account deficit
Foreign Economy has high PL and high DI
$ appreciates
S$ decreases and D$ increases
US EX decreases and IM increases
PL decreases and RGDP decreases
US G/S Relatively Less expensive and foreign G/S are relatively more expensive