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Suppose there is a temporary increase in Yw, world income, which increase the demand for domestic goods on the world market.
On the graph of Output, Money and Foreign exchange markets show the short-run effect of Yw increase. (Note: on the graph, show the final effect on the equilibrium values of Y, R, E. Do not show the automatic stabilizers' effect)

a) Now suppose the government wants to prevent the overheating of the economy, and pursues contractionary fiscal policy. How will this policy affect the values of Y,R,E, q, Employment ?

b) What if the Central Bank pursues contractionary monetary policy instead? How will this policy affect the values of Y, R, E, q, CA, Employment?

c) If the shock originates on the output market, which policy creates least distortions in the economy?

Microeconomics, Economics

  • Category:- Microeconomics
  • Reference No.:- M9489250

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