Understanding Economic Policies: Monetary and Fiscal Approaches

Explore the dynamics of economic equilibrium, aggregate demand, and supply while delving into the effectiveness of monetary and fiscal policies. Learn about strategies to tackle inflation and unemployment through contractionary and expansionary measures, and how crowding out can impact the economy. Understand the implications of short-run and long-run aggregate supply on economic growth and stability.

• Economic policies
• Monetary policy
• Fiscal policy
• Aggregate supply
• Inflation

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Uploaded on Aug 03, 2024 | 0 Views

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1. 3. Equilibrium P LAS SAS P* AD Y Yf Y*

2. 4.a. Aggregate demand AD0 -> AD1 => P Y P LAS SAS => unemployment decreases but inflation increases AD1 AD0 AD2 P1 AD0 -> AD2 => P Y => unemployment increases but inflation decreases P0 P2 Y Yf Y2 Y0 Y1

3. 4.a.(2)(a) Monetary policy AD0 -> AD1 => P Y P LAS SAS => unemployment decreases but inflation increases AD1 AD0 Use contractionary monetary policy to deal with the problem of inflation AD2 P1 AD0 -> AD2 => P Y => unemployment increases but inflation decreases P0 P2 Use expansionary monetary policy to deal with the problem of unemployment Y Yf Y2 Y0 Y1

4. Effectiveness of monetary policy r r r0 r0 r1 r1 IRE IRE IRE0 IRE1 IRE IRE0 IRE1 IRE

5. 4.a.(2)(b) Fiscal policy AD0 -> AD1 => P Y P LAS SAS => unemployment decreases but inflation increases AD1 AD0 Use contractionary fiscal policy to deal with the problem of inflation AD2 P1 AD0 -> AD2 => P Y => unemployment increases but inflation decreases P0 P2 Use expansionary fiscal policy to deal with the problem of unemployment Y Yf Y2 Y0 Y1

6. 4.a.(2)(b) i) Crowding out r MS0 MS1 r r1 r1 r0 r0 r2 MD1 IRE MD0 IRE1 M M0 IRE0 IRE Crowding out

7. b. Short-run aggregate supply SAS1 P Resource costs increase: LAS SAS0 SAS0 -> SAS1 => P Y => unemployment increases and inflation increases Worst possible situation: - Using expansionary policy to deal with unemployment makes inflation worse P1 P0 AD - Using contractionary policy to deal with inflation makes unemployment worse Y Yf Y1 Y0

8. c. Long-run aggregate supply P SAS LAS0 LAS1 SAS More resources, more efficient use of resources, improved technology => economic growth SAS0 -> SAS1 => P Y P0 => unemployment decreases and inflation decreases P1 AD Y Y1 (Yf)1 Y0(Yf)0

9. 5. Business cycle Y Peak Recession Expansion Turning points Trough Time