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