Fiscal Policy with Flexible Rates

Fiscal Policy with Flexible Rates - flexible. Shocks to the...

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Fiscal Policy with Flexible Rates Consider an expansionary fiscal policy. This has two effects as well: (1) AD and real GDP rise, worsening the trade balance, and (2) the higher interest rates caused by the bigger budget deficit attract capital inflows which improve the balance of payments (this is a short run phenomenon). These two effects work in opposite directions but the net result is probably a fall in the value of the dollar which causes real GDP to rise. Monetary policy is more effective than fiscal policy when exchange rates are
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Unformatted text preview: flexible. Shocks to the Economy 1. domestic monetary shock - e.g. increase in money demand 2. domestic spending shock - flexible rates are procyclical 3. international capital flow shocks - e.g. capital outflow 4. export demand shock 5. import supply shock Flexible exchange rates stabilize external shocks but magnify internal shocks. Fixed or Flexible Exchange Rates? 1. types of macroeconomic shocks 2. policy tool preferences 3. policy goals 4. controlling inflation 5. variability...
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This note was uploaded on 11/22/2011 for the course FIN FIN1100 taught by Professor Bradrifkin during the Fall '09 term at Broward College.

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