(Answered) Expectations of policy variablesusing the is-lm model for

Economics

Expectations of policy variables

Using the IS-LM model for the following:

a. Suppose an economy gets into a liquidity trap. If the central bank manages through 'forward guidance' to persuade everyone that it will maintain the interest rate at 0 for the next few years, explain what might happen today to the IS curve and thus to equilibrium output.

b. Suppose a government announces that its fiscal policy will have to be tighter in future years to cope with the future fiscal implications of the ageing population. How will this announcement affect the economy today? Will it have more or less impact if the policy begins to be implemented today, rather than in the future? Does it matter how far into the future the policy will be implemented?

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Business Economics, Economics

Category:- Business Economics
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