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Unformatted text preview: Another example is needed. Say the Fed uses contractionary monetary policy such as selling government bonds, increasing the reserve requirement, or increasing the federal funds rate. This causes the interest rate to rise which causes consumption to fall and investment to fall. But, in order for the total level of output to remain fixed, net exports must rise by the same amount that consumption and investment fall. In this way, total output does not change from monetary policy, but the division of total output is affected. Fiscal policy has a very important affect on the division of total output. This is one major negative effect of fiscal policy. Recall that the tools of fiscal policy are taxes and government spending. When the government increases government spending, there should be an indirect increase in output, as mitigated by the government spending...
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This note was uploaded on 12/13/2011 for the course ECO 1310 taught by Professor Staff during the Fall '10 term at Texas State.
- Fall '10