Question

Answer as a paragraph please

What would be the ideal kind of coordination between fiscal and monetary policies when the economy falls into a recession?

Answer 1

Aggregate expenditure is a sum of consumption , investment , government expenditure and net exports .

AE = C + I + G + NX

Also , Y = AE

So when the autonomous expenditure increases , there is a expansionary fiscal policy .

When there is a increase  change in monetory terms or in the demand and supply of the money supply, there there will be the expansionary monetory policy .

IS shows the negative relationship between the interest rate and output . It is effected when fiscal policy is effected.LM shows the positive relationship between the interest rate and output . It is effected when monetory is effected. Interesection represents the equilibrium .

So during the recession , when output falls below , basically there is a combination of both the policy used in shifting of the IS and LM curve respectively . So in such case there is a expansionary fiscal policy which shift the IS curve rightwards abreast with the expansionary monetory policy which shift the LM curve . Hence shifting of both curve lead to rise in the output and stability of interest rate .