In the great southern city of Picenium, the government runs a contractionary fiscal policy, and the central bank runs an expansionary monetary policy. Using an IS/LM model, explain the combined effect that this contractionary fiscal policy (assume G decreases, but T is constant) and expansionary monetary policy have on the economy. Be sure to explain all the underlying mechanisms, and if output and interest rates are higher/lower or indeterminate after the changes in policies.

In the great southern city of Picenium, the government runs a contractionary fiscal policy, and the central bank runs an expansionary monetary policy. Using an IS/LM model, explain the combined effect that this contractionary fiscal policy (assume G decreases, but T is constant) and expansionary monetary policy have on the economy. Be sure to explain all the underlying mechanisms, and if output and interest rates are higher/lower or indeterminate after the changes in policies.

MACROECONOMICS

14th Edition

ISBN:9781337794985

Author:Baumol

Publisher:Baumol

Chapter15: The Debate Over Monetary And Fiscal Policy

Section: Chapter Questions

Problem 3DQ

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