Final ex - short answer questions - Assignment Example

2) Budget deficits lead to high interest in the, which in turn reduces the net foreign investment. The reduction in the net foreign investment increases the demand of dollars due to reduction in dollar supply. This makes the E to appreciate in value and reducing the value of NX. 2) The Fed should conduct a policy to stabilize the production of goods and services. In this case the fiscal policy should have aimed at stabilizing the production. The policies should ensure that the prices dont adjust immediately.

For an economy in recession, the Keynesian takes the cation of stabilizing output by the use monetary policies and fiscal policies. They believe that the government should take the place of restoring the economic order, but not the private sector. They believe that expansive monetary policies will create employment and fiscal policies will avail more money for lending hence investments and economic order. The classicalists advocate for keeping in order the supply factors to bring economic growth.

They emphasize on improving the supply side of production so as to achieve economic growth. In this case the factors of production such as labor and capital should be increased, hence increasing the level of output. They emphasize on the use of market sources to stabilize the economy. Increase in domestic production will lead to large exports, hence export earnings and a favorable balance of payments. The monetarists advocate of growing the supply of money at a low constant rate, in order to maintain the price relatively constant.

Emphasize that fiscal policies such as increasing the spending by the government will lead to increased interest rates. The fractional reserve banking was to be blamed for the Great Depression of 1929-1933. The high reserve requirement ratio leads to very minimal withdrawals by the account holders. This in turn made them to have a very minimal amount to