National Economic Policy assignment

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1. Assume that the policymakers in a closed economy want to increase output without changing interest rates. What kind of policy mix would you recommend and how would your policy mix affect the components of GDP? Explain your answer and the adjustment processes that take place with the help of an IS-LM diagram. [6 marks]

2. In the short-run, the effect of an expansionary fiscal policy on the output level is very large when money demand is highly sensitive to the changes in the interest rate. Do you agree or disagree with this statement? Why? Use appropriate diagram(s) to explain your answer. [2 + 6 = 8 marks]

3. Suppose an economy characterized by flexible prices and rigid nominal wage in the short-run. Using Aggregate Demand—Aggregate Supply framework, discuss the short-run and long-run effects of an increase in money supply on the price level, real GDP, nominal wage rate and real wage rate. [6 marks)

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