Describe How an Inconsistent Policy Affects the Equilibrium Level of Output

Question

Examlex · Accepted Answer

The Answer is Mixtures of fiscal and monetary policy that are inconsistent with one another (one expansionary and one contractionary) are inconsistent with internal balance objectives. For example, a mixture of a contractionary monetary policy and expansionary fiscal policy produces an ambiguous outcome for the equilibrium level of output and the price level in the short run. When policy mixes are inconsistent, they can have ambiguous effects on the domestic economy in the short run. However, inconsistent policy mixes have explicit effects on a country's external balance. An expansionary fiscal policy coupled with a contractionary monetary policy causes the currency to appreciate and likewise the current account balance would deteriorate. In this case, both fiscal and monetary policies reinforce each other and the effect on a country's external balance can be quite significant. The same would be true of a contractionary fiscal policy coupled with an expansionary monetary policy. In this case, the exchange rate depreciates and the country's current account balance improves. The important point is that these types of policy mixes can have extreme effects on a country's external balance.

Describe How an Inconsistent Policy Affects the Equilibrium Level of Output

Essay

Correct Answer:
Verified

Describe How an Inconsistent Policy Affects the Equilibrium Level of Output

Essay

Correct Answer:VerifiedShow Answer

Correct Answer:
Verified