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