Question one a
Considering the injection-leakage approach and the aggregate expenditure, the effects on the equilibrium income as a result of the decrease in the proportional task can be effectively explained. These effects can be generally termed as the multiplier effects. There can be either appositive or negative effects. An initial decrease in injection on an increase in leakage, the effects results in a greater fiscal increase in the GDP. An increase in the injection and the decrease in the leakage on the other hand can result to a decrease in the level of the GDP. Take for example when there is an injection of extra demand and output into the country’s economy, there will be greater benefits for the businesses ranging from architect and various suppliers. Construction of many new hours has the effects of the generation of the new flow of relative factor incomes into the economy in general.
Question one b
Aggregate demand can be primarily stated to comprise of four primary components that includes the net exports, government expenditure, b investment and consumption. Consumption is likely to change for many reasons ranging from taxes to future income expectations. The levels of investments can also vary in response to the level of the future economic growth expectations. This is affected from a range of values including investments tax incentives key inputs and technologies
Question two a
The relationship between the effectiveness of the fiscal policy and the interest elasticity is best explained through the use of the LM and the IS framework. A pursuance of an expansionary monitory policy can be affected by the monitory authority. The LM curve is shifted to the right by an increase in the money supply. Such fiscal policy will be very effective in case there is an intersection between the IS curve and the LM curve to the right of the graphical presentation. For this case, there is a perfectly inelastic demand for money and therefore there will be a significant reduction in the interest rate in response to the increase in money supply. This relation can be effectively illustrated through the incorporation of the following diagram
In relation to the fiscal policy, the effects of the policy is mainly dependent on the on the extent of the shift and the slops of the curves IS and LM. Suppose there is an attempt by the fiscal policy to increase the levels of government spending and employs the use of bonds in the financing, it must been stated that the increase in the level of government spending will result in the shifting of the curve to the right. The effectiveness of such policy will be effective in case there is an intersection between the IS and LM curve within the Keynesian range. At this range LM is perfectly elastic. The policy with be moderately effective In case the occurrence is in the intermediate range where there is an elastic LM. For the classical range, the policy can be considered ineffective and LM is considered perfectly elastic for the case. This relation is further achievd through the incorporation of the following graph
Question two b
Considering the Mundell’s Flemming Model , the policy actions of decrease In money supply is effectively analyzed through in the consideration of the flexible exchange rate. Considering a more expansionary money policy, there is the results of shifting the LM curve to the new position of the LM prime. The equilibrium is also made to shift from Eo to E1. Being that the exchange rates are flexible, a different situation is likely to result. The domestic currency is depreciated from the balance of payment deficits. The net exports is thus greatly reduced. The resultant equilibrium point is reached at the given extent E2 and at this point, the production can be stated to have increased greatly and under these respective circumstances, the monitory policy is likely to succeed.
It is easy to see why Mundell devised what is known as the impossible trinity. It is thus very simple to state why impossible trinity was derived by Mundell. That generally states that no single economy can survive under the three prevailing circumstances: Fixed exchange rate, perfect mobility of capital and an efficient monitory policy.
