- Assume a government thinks the economy is overheated, and wants to reduce the income. While...

 

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- Assume a government thinks the economy is overheated, and wants to reduce the income. While using the short run equilibrium diagram with AA and DD schedules for an open economy, a. Show the impact of a TEMPORARY reduction of government spending (TEMPORARY contractionary fiscal policy) on the equilibrium levels of income and the exchange rate, and explain the observed changes b. Show the impact of a TEMPORARY reduction in the nominal money supply (TEMPORARY contractionary monetary policy) on the equilibrium levels of income and the exchange rate, and explain the observed changes c. Discuss which of these TEMPORARY contractionary policies a government should implement if the target is also to improve the trade balance - Assume a government thinks the economy is overheated, and wants to reduce the income. While using the short run equilibrium diagram with AA and DD schedules for an open economy, a. Show the impact of a TEMPORARY reduction of government spending (TEMPORARY contractionary fiscal policy) on the equilibrium levels of income and the exchange rate, and explain the observed changes b. Show the impact of a TEMPORARY reduction in the nominal money supply (TEMPORARY contractionary monetary policy) on the equilibrium levels of income and the exchange rate, and explain the observed changes c. Discuss which of these TEMPORARY contractionary policies a government should implement if the target is also to improve the trade balance

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In an open economy the equilibrium levels of income and the exchange rate are influenced by both domestic and foreign factorsThe impact of the two temporary contractionary policies on the shortrun equ... View the full answer