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.

Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter27: Issues In Macroeconomic Theory And Policy

Section: Chapter Questions

Problem 2P

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