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ECO 301 University of Miami Implementation of the Expansionary Fiscal Policy Question
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Consider an exogenous increase in real money demand in a closed economy. Assume that prices are fixed in the short run.
(a) Will the interest rate increase in the short run?
(b) Will output increase in the short run?
(c) Will the price level increase in the transition from the short run to the long run (absent any policy response)?
(d) If FISCAL policy is used to stabilize OUTPUT in the short run, will it also stabilize the interest rate in the short run? Give an example of such a policy.
(e) If MONETARY policy is used to stabilize the INTEREST RATE in the short run, will it also stabilize output in the short run? Give an example of such a policy.
