Suppose Chad is a closed economy facing a severe recession. To tackle the recession, her government increases her spending on infrastructure.

a. Assume that the central bank is independent on the government decisions.

i. Use the IS-LM model to explain how the above government action affects the interest rate and output level of Chad.

ii. If investment demand in Chad is interest inelastic, evaluate the effectiveness of the above government act in tacking the recession. (10 marks)

b. Instead, the Constitution of Chad requires the central bank to “support the government’s economic objectives”. Accordingly, how should the central bank of Chad react? Compare against the results in (a)(i). (3 marks)

c. For the case of a recession in Chad, discuss the pros and cons of the Constitution stated in (b). Write your arguments briefly, precisely and concisely. (4 marks)

Answer rating: 100% (QA)

A i Using the ISLM model the governments spending on infrastructure would increase aggregate demand ... View the full answer