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