Chapter 12

Question 1

Policies

Answer 1

1. Fiscal policy
2. Monetary policy
3. Exchange rate policy
4. Incomes and price policy

Question 2

Fiscal policy

Answer 2

• govt. expenditure and revenue
• e.g. cut corporate taxes
• poss. impact on AD: increase I
• poss. impact on AS: increase productive cap. in the long-run

Question 3

Monetary policy

Answer 3

• interest rate
• e.g. raise interest rates
• poss. impact on AD: decrease I
• poss. impact on AS: reduce productive capacity in the long-run

Question 4

Exchange rate policy

Answer 4

• exchange rate
• e.g. depreciate domestic currency
• poss. impact on AD: increase net X (assuming PED for M >1)
• poss. impact on AS: raise COP through higher price of imported resources

Question 5

Incomes and price policy

Answer 5

• incomes and price controls
• e.g. lower CPF employee contributions
• poss. impact on AD: increase C
• poss. impact on AS: lower CPF contributions can lower COP