Why Choose Us?
0% AI Guarantee
Human-written only.
24/7 Support
Anytime, anywhere.
Plagiarism Free
100% Original.
Expert Tutors
Masters & PhDs.
100% Confidential
Your privacy matters.
On-Time Delivery
Never miss a deadline.
In the context of the IS LM model, suppose an economy in which the economic authorities carry out a contractionary fiscal policy
In the context of the IS LM model, suppose an economy in which the economic authorities carry out a contractionary fiscal policy. In view of this policy, the following is observed:
- A decrease in GDP.
- A decrease in investment.
What can explain the behavior of these variables?
A. Given the contractionary fiscal policy, the central bank simultaneously carried out a sale of bonds in the open market.
B. The economy is not in the liquidity trap.
C. The central bank does not have an interest rate target.
D. All options.
Expert Solution
Answer to the following queston:
Option A: Given the contractionary fiscal policy, the central bank simultaneously carried out a sale of bonds in the open market.
Explanation: A contractionary fiscal policy will shift the IS curve to the left which will cause the GDP of the nation to fall and will also cause the interest rate to fall. On the other hand, to make the policy action more effective, the cetral bank will sell bond in the open market which will lower the money supply in the economy. This will shift the LM curve to the left and will cause th GDP to fall more and also the interest rate to increase. Increase in the rate of interest will cause the investment to fall.
Archived Solution
You have full access to this solution. To save a copy with all formatting and attachments, use the button below.
For ready-to-submit work, please order a fresh solution below.
