i) What is the difference between monetary policy and fiscal policy? How are the

Question

i) What is the difference between monetary policy and fiscal policy? How are they similar in their effects in the short run? Explain.

ii) Suppose that consumers become pessimistic about the future health of the economy. What will happen to aggregate demand, output, and employment in the short run? Use the AD/AS figure to illustrate.

iii) Considering the macroeconomic effects of pessimism, what might the President and Congress have to do to keep output and employment stable? Use your AD/AS figure to explain and illustrate.

iv) In the same circumstances, what can the Federal Reserve Bank do to keep output and employment stable? Use your AD/As figure to explain and illustrate.

Explanation / Answer

1.

Monetary Policy

Monetary policy is carried out by the Central Bank / Monetary authorities and involves:

Fiscal Policy is carried out by the government and involves changing:

Monetary and fiscal policy similar in their effects in the short run as shown below-
.

In the short run both policy have same effects on I, Y, and p. in both cases interest decreases, output and price increases

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