Explain expansionary monetary policy

Reference no: EM13724121 , Length: word count:1500

Question 1

Suppose that the policymakers want to increase the level of output while keeping the interest rate unchanged. What policy or policy mix would you recommend to achieve the above goal?

Using the IS-LM framework, explain clearly why you would recommend it and how it would work.

Question 2

Consider a situation in which a country has suffered from a large negative shock to aggregate demand but at the same time is facing very low interest rate.

a) Explain, using the IS-LM diagrams, the likelihood of restoring the economy through an expansionary monetary policy.

b) Compare the effectiveness of fiscal policy relative to monetary policy in the above context.

Question 3

The Solow growth model is based on the assumption of an exogenous technological progress. We relax this assumption and consider that technological progress is, to a large extent, determined by Research and Development (R&D). Now suppose, the government has increased its expenditure on R&D. Explain the long-run impact of this policy on both growth and living standards.

Reference no: EM13724121

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