Homework Help: economics

Posted by Anonymous on Wednesday, June 17, 2009 at 4:55pm.

Suppose government spending increases in a closed economy. Would the effect on aggregate demand be larger if the Bank of Canada took no action in response, or if the Bank were committed to maintaining a fixed interest rate? Explain

economics - economyst, Thursday, June 18, 2009 at 3:09pm
I presume you are from Canada.

Larger under b) the bank is committed to maintaining a fixed interest rate.
Use a IS/LM curve analysis. An increase in G shift outward the IS curve, Which, by its self, increase aggregate demand and interest rates. To maintain a constant r, the Bank increases the money supply which !@#$%^&f outward the LM curve.

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