W5P2 - Notebook LM Flashcards
How effective is fiscal policy under fixed exchange rates?
Fiscal policy is effective under fixed exchange rates. An increase in government spending shifts the IS curve to the right, and the central bank must increase the money supply to maintain the fixed exchange rate, shifting the LM curve and increasing output.
How effective is monetary policy under fixed exchange rates?
Monetary policy is not effective under fixed exchange rates. Any change in the money supply would lead to currency fluctuations, which are not allowed.
What happens when domestic inflation is greater than foreign inflation under fixed exchange rates?
When domestic inflation is greater than foreign inflation, the real exchange rate appreciates, leading to a decline in net exports and output. The central bank will then decrease the money supply.
What determines the long-run aggregate demand schedule under fixed exchange rates?
The long-run aggregate demand schedule is pinned down at the foreign inflation rate. Domestic inflation must equal foreign inflation for net exports to remain stable.
How effective is fiscal policy under flexible exchange rates?
Fiscal policy is ineffective under flexible exchange rates. An increase in government spending leads to an appreciation of the currency, decreasing net exports.
How effective is monetary policy under flexible exchange rates?
Monetary policy is effective under flexible exchange rates. An increase in the money supply lowers domestic interest rates, leading to a depreciation of the currency and an increase in net exports.
What happens when domestic inflation is greater than domestic money growth under flexible exchange rates?
When domestic inflation is greater than domestic money growth, the real money supply declines, leading to a decrease in output.
What does the short-run aggregate demand schedule look like under both fixed and flexible exchange rates?
The short-run aggregate demand schedule is downward sloping under both fixed and flexible exchange rates.
What determines the long-run aggregate demand schedule under flexible exchange rates?
The long-run aggregate demand schedule is determined by the domestic money growth rate. Inflation must equal domestic money growth for the long run aggregate demand schedule to be stable.
How does the control of the long-run aggregate demand schedule differ under fixed and flexible exchange rates?
Under fixed exchange rates, the long-run aggregate demand is determined by foreign inflation rates (outside of domestic control), while under flexible exchange rates, it is determined by domestic money growth (controlled by the central bank).
