1) Using an AS-AD model of the economy, demonstrate on a graph how different fiscal and...

1) Using an AS-AD model of the economy, demonstrate on a graph how different fiscal and monetary policies impact the economy.

2} How would you calculate the fiscal policy change needed to achieve full employment?

Solutions

Expert Solution

Different fiscal and monetary policies are used to create impact on economy. The figure A is representing the economy when there is no any policy being implemented. Now, if the government and Fed want to implement expansionary fiscal and monetary policies respectively, then it will stimulate the AD and it will shift to the right at new AD in Figure B. It will help to cover the recessionary gap. Here, fiscal policy will be increase in spending, decrease in taxation. Monetary policy will be to reduce the interest rate and increase the money supply.

When there is an inflationary gap, in the economy, then there is contractionary fiscal and monetary policy to be implemented. It will decrease the AD and shift to the left so that objective is achieved as shown in figure C.

Here, fiscal policy will be decrease in spending, increase in taxation. Monetary policy will be to increase the interest rate and decrease the money supply.

Pl. repost other unanswered questions for their proper answers!

Rahul Sunny answered 11 months ago

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