Monetary and Fiscal Policy - Assignment
Added on - 16 Sep 2019
Analysis of Monetary and Fiscal Policy
This report is on "analysis of monetary and fiscal policy". The aim of this report is to determine the short-run effects on the various aspects of the economy when the confidence of the consumer falls, the effects of the policy mix on the interest rate, consumption, investment, the real exchange rate, the budget, and trade balances and to determine the impact of the policies in the European countries that are affected by the liquidity trap. Short-run effects of a fall in consumer confidence on the interest rate, consumption, investment, the real exchange rate, and net exports due to the consumer confidence has declined in the economy, and as a result of that, the total demand has also decreased.
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Short-run Effects on the Economy
From the above report "short-run effects on the economy", we conclude that when the confidence of consumers falls, there is a decrease in the output of the economy, the rate of interest, exchange rate, investment, and net exports fall too. For recovering the economy from recession, a mix of monetary and fiscal policy is required and expansionary policies are used for helping the economy is recovering. With the policy mix, the rate of interest rises, the exchange rate improves and the economy starts to boom. But, a liquidity trap is one situation that is capable of making the monetary policies ineffective in the economy. When the economies fall into a liquidity trap as it happened in the case of European countries, the monetary policy gets failed and it no longer becomes effective.