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