Question

Consider the simple model of goods/services market (with government and foreign trade AE=C+I+G+Xn) and the money market (Dm-Sm).Suppose the following policy mix is caried out:

1) government spending is increased

2) the central bank buys securities in open market

Lookat the markets seperately in questions (a) and (b)

A) what would be the effect of higher government spending on the goods/services market?

Show the changes on AD-AS graph and discuss them

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B) what would be the effect of buying securities by the central bank on the money market?

Show the changes on graph and discuss them

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C) what would be the effect of the changes in the goods/services market on the money market? Explain

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D) what would be the effect of the changes in the money market on the goods/services market? Explain

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E) what is the final effect of the described policy mix on the equilibrium GDP, on inflation, unemployment and interest rate?