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Unformatted text preview: For example, say the Fed uses expansionary monetary policy such as purchasing government bonds, decreasing the reserve requirement, or decreasing the federal funds interest rate. This causes the interest rate to fall, which then causes consumption to rise and investment to rise. But, in order for the total level of output to remain fixed, net exports must fall the same amount that consumption and investment rise. In this way, total output does not change from monetary policy, but the division of total output is affected. 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 investment to fall....
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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