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Resequence Fiscal and Monetary Policy-FOREX

Last updated about 1 year 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
PL decreases and Real Output decreases
Interest sensitive spending (C+I) decreases
Dlf increases since the government needs loans OR Slf decreases since the banks are lending to the government

Question 2

2.

Central Bank Expansionary Monetary Policy

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

AD increases
UE decreases
Interest sensitive spending (C+I) 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
US G/S Relatively Less expensive and foreign G/S are relatively more expensive
US Nx decreases causing a Current Account deficit

UE increases

real interest rate increases

G inc and T dec

Ms increases

Real interest rates decrease and Qlf increase

PL increases and Real Output increases

Slf increases

Central Bank Buys Bonds

NX decreases causing a current account deficit

UE increases

S$ decreases OR D$ increases

AD decreases

Real interest rates increase and Qlf decrease

PL decreases and RGDP decreases

Nominal interest rates increase and Qm decreases

$ appreciates

Ms decreases

Foreign G/S are relatively less expensive AND Domestic G/S are relatively more Expensive

US EX decreases and IM increase

Central Bank Sells Bonds

Slf decreases

$ can buy more foreign currency and foreign currency can buy less $

UE increases

$ appreciates

US EX decreases and IM increases

PL decreases and RGDP decreases

S$ decreases and D$ increases

Foreign Economy has high PL and high DI