Question

“To increase the aggregate income level, a country which adopts a flexible exchange rate system with imperfect capital mobility should implement expansionary fiscal policy”. Do you agree with this statement? Why and why not? Explain and You need to show and compare the effects of both policies (monetary and fiscal) on the aggregate income level].

Answer 1

In this case, to increase the aggregate income level means the overall increase of income level a country adopted a flexible exchange rate system with imperfect capital mobility and it should implement expansionary fiscal policy.
Yes, I agree with this statement because the overall rise of income level in a country under a flexible exchange rate is important because flexible exchange rate means the exchange rate is decided with the help of demand and supply forces in the foreign exchange market and as here it is mention that the mobility of the capital is imperfect show the implementation of expansionary fiscal policy is also important to apply in the country it means the fiscal policy include the taxation and the government expenditure the taxation plays an important role in the capital formation because a supportive taxation system increases the investment in the economy and it will raise the capital inflow in the country and the government expenditure increases the strength of the domestic industry so that they can complete with the International competition.
But for the comparison of the effect of both monetary and fiscal policy on the aggregate income level is described as follows.
The monetary policy includes bank rate cash reserve ratio statutory liquidity ratio open market operations repo rate reverse repo rate.
Fiscal policy includes taxation and government expenditure.
In the case of monetary policy, the aggregate income level increases only by increasing the investment in the economy and the investment can only increase in the economy when there is proper applicability of a supportive bank rate system, repo rate system, reverse repo rate system and there is the purchase of Government Bonds in the market.
In the case of fiscal policy, the aggregate income level applies according to taxation and government expenditure in the economy. In the case of taxation, the government should reduce the tax rate for the increment of investment in the economy because a rise in investment will lead to a rise in income in the economy.
The government should increase their expenditure because if the expenditure from the side of the moment will increase then definitely it will increase is the investment in the economy and as the investment increases there must be an overall increase in the income in the economy.