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A small open economy with a floating exchange rate is in recession with balanced trade. If policymakers want to reach full employment while maintaining balanced trade, what combination of monetary and fiscal policy should they choose?
As you have learned in Unit 8 (this week), monetary and fiscal policy play important roles in economic stimulation and or stabilization. In this regard:
a. When is it appropriate to use monetary and fiscal policy to stimulate or stabilize the economy?
b. When is it inappropriate to use monetary and fiscal policy to stimulate or stabilize the economy?
c. What specific fiscal policy tools would you use to stimulate aggregate demand and how?
d. What specific monetary policy tools would you use to stimulate aggregate demand and how?
e. What is your conclusion, should policymakers use the monetary and or fiscal policy to stimulate aggregate demand? Explain briefly.
Suppose that and the goal of the policymakers is to decrease C and increase I without changing.
a. Can the policymakers achieve these objectives by using only fiscal policy? Explain.
b. What combination of monetary and fiscal policies are needed to achieve these objectives? Illustrate and explain.
