Question

Here is the questions: The government of Argentina believes that the country's economy is stagnating and implements a major increase in public expenditure in order to stimulate the economy during the current year. Because the government has problems borrowing in domestic and international credit markets these days, it decides to have the Central Bank of Argentina print money and buy government bonds, so that the government will have sufficient money to spend. Assume that the exchange rate is flexible and the interest parity condition holds. Also, assume that the price level is exogenously determined and the conditions in the rest of the world remain unchanged. Finally, assume that the government's policy is viewed as temporary and has no impact on the course of the economy beyond the current year.

What I need help with is identifying how would the policy affect Argentina's LM curve this year

The next question that is troubling me is how would the policy affect Argentina's IS curve this year

Also, the question asks how would the policy affect the equilibrium real income and the nominal interest rate in Argentina

and lastly the one I need help with is how would the policy affect the levels of private consumption, investment, and net exports of Argentina's economy this year

Answer 1

The Lm curve will shift rightwards with a decrease in interest rates and an increase in income.

The IS curve will will also shift rightwards with a increase in interest rates and an increase in income.

With this policy the interest rates will decrease and the real income of Argentina will increase.

Private consumption of Argentina will increase with a increase in income and investment may also increase depending upon personals.How ever the net export remains unchanged as resources are inversely proportional to purchasin power.