BUSN5620_Final - 1. A. Explain why the effectiveness of...

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1. A. Explain why the effectiveness of Monetary or Fiscal policy depends on the slope of the curves. Monetary Policy Effectiveness and the slope of the IS curve - If IS steep (low interest elasticity of I) a given change in Ms results in large rise in r and little change in Y – Monetary policy ineffective. -If IS flat (high interest elasticity of I) a similar change in Ms results in small rise in r and - large change in Y – Monetary policy effective. - Monetary policy more effective the greater the interest sensitivity of I. - Vertical IS where interest elasticity = 0 - Y = 0. Fiscal policy effectiveness and the Slope of the IS Curve - If IS steep (I is interest inelastic) then G[1/(1-b)] causes substantial Y but also r. - Closer to vertical means greater the multiplier effect – more effective is fiscal policy. - If IS flat (I is interest elastic) then same G[1/(1-b)] causes small Y and small r. - When IS vertical then rise in r has no effect on I and full multiplied effect of G felt. Monetary policy causes a greater change in output. The flatter the
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BUSN5620_Final - 1. A. Explain why the effectiveness of...

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