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March 29, 2017

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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 - ,

    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 shifts outward the LM curve.

  • economics - ,

    no

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