ECS3702 Assignment 2 (COMPLETE ANSWERS) Semester 2 2024 - DUE 6 September 2024
ECS3702 Assignment 2 (COMPLETE ANSWERS) Semester 2 2024 - DUE 6 September 2024 ; 100% TRUSTED Complete, trusted solutions and explanations. Ensure your success with us...
ECS3702 Assignment 2 (COMPLETE ANSWERS) Semester 2 2024 - DUE 6 September 2024 ; 100% TRUSTED Complete, trusted solutions and explanations. Ensure your success with us...
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ECS3703
Assignment 2
(COMPLETE
ANSWERS)
Semester 1 2024 -
DUE 8 April
2024 ;100%
TRUSTED
ADMIN
[COMPANY NAME]
, Question 1[25] Assume Nation A operates under a flexible exchange rate
system, the principle of imperfect capital mobility, and desires to achieve both
the internal and external balance. (a) Which macroeconomic policy should
Nation A use to simultaneously achieve internal and external balance and
why? ………………….………(7) (b) With the aid of a diagram, briefly explain
how Nation A can use the policy mentioned in (a) to achieve the internal and
external balance…………...(18)
(a) To simultaneously achieve internal and external balance under the conditions of flexible
exchange rates and imperfect capital mobility, Nation A should employ a combination of fiscal
and monetary policies known as the "policy mix." This involves coordinating fiscal policy
(government spending and taxation) and monetary policy (control over the money supply and
interest rates) to achieve both domestic stability (internal balance) and external equilibrium
(external balance).
Specifically, Nation A can use expansionary fiscal policy coupled with a tight monetary policy.
Expansionary fiscal policy involves increasing government spending and/or reducing taxes to
stimulate aggregate demand, thereby boosting domestic output and employment to achieve
internal balance. Meanwhile, a tight monetary policy involves raising interest rates or reducing
the money supply to control inflation and stabilize the currency exchange rate, thereby helping to
achieve external balance.
(b)
To illustrate how Nation A can use the policy mix to achieve internal and external balance, we
can employ the AD-AS (Aggregate Demand-Aggregate Supply) model.
First, let's consider the effects of expansionary fiscal policy on the AD-AS diagram:
1. Expansionary Fiscal Policy:
Increases in government spending or reductions in taxes shift the Aggregate Demand
(AD) curve to the right.
This leads to higher output (real GDP) and potentially higher price levels.
Now, let's incorporate the effects of tight monetary policy:
2. Tight Monetary Policy:
Raising interest rates or reducing the money supply shifts the Aggregate Demand (AD)
curve to the left.
This counters the inflationary pressure generated by expansionary fiscal policy, helping
to stabilize prices and maintain external balance.
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