Suppose the Swiss federal government in Bern proposed building a high-speed train line from Zurich to Geneva. Instead to taking the normal 2.5 hours to get from one city to the other, the new line would reduce the travel time to only 55 minutes. In doing so, Zurich residents could commute and work in Geneva and vice versa. Similarly, tourists would have much quicker access to cities in the nation's northeast and southwest regions. The estimated cost of the project is SFr 5 billion, which the government intends to finance from domestic capital markets.
a. Is this policy an example of fiscal policy, monetary policy, or is it a combination of policies?
b. Use the Three-Sector Model to determine the effects this government spending will have on Switzerland's real and nominal GDP, GDP Price Index, real exchange rate, quantity of Swiss francs traded per period, real risk-free interest rate, real and nominal interest rates, and quantity of real loan able funds per period. Use both graphical analysis and brief explanations to support your answers. Assume: (1) the Swiss National Bank commits itself to fix the exchange rate at 1.20 Swiss francs per euro (i.e., SFr1.2/€, which is €0.833/SFr); (2) Switzerland's international capital markets are highly mobile; (3) Switzerland is in the intermediate range of its aggregate supply curve; and (4) the Swiss national government has a budget deficit before the policy change.