The shape of the aggregate supply curve of Xanadu is flat and the government applied contractionary...

The shape of the aggregate supply curve of Xanadu is flat and the government applied contractionary monetary and fiscal policy for increasing economic growth. According to these policies, what happens ? If these policies are not the correct ones, draw graphs and show and explain the correct ones.

Expert Solution

Contractionary monetary policy and contractionary fiscal policy will reduce overall credit availability and supply of loanable funds and thus disposable incomes will decline causing lower consumption and lower aggregate demand and thus economic growth will fall which suggests this is wrong policy.

An expansionary fiscal policy by reducing taxes and inducing higher spending and automatic stabilizers and an expansionary monetary policy through interest rate reduction and bond buying programmes will boost liquidity, induce higher credit availability and spending and thus consumption and aggregate demand will ride. This will bring higher economic growth and real GDP.

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Rahul Sunny answered 1 year ago

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