For this assignment we will focus on contrasting the effectiveness of fiscal policy when interest rates are exogenous versus when they are endogenous. In which case is fiscal policy more effective? Explain why?

The effectiveness of fiscal policy – exogenous or endogenous.

ECN327
Depth of analysis matters.
1. Contrast the effectiveness of fiscal policy when interest rates are exogenous versus when they are endogenous. In which case is fiscal policy more effective? Explain why?
Fiscal policy is
●     IS-LM Questions presentation, last part.
What you’re doing is comparing the effectiveness of fiscal policy in interest rates when exogenous or endogenous, then which case is more effective.
Interest rates are exogenous, only changing when it is assumed they change, which contradicts reality, since changes in Y cause r to change.  Fiscal Policy – Manipulation of AE by the federal government to move the economy in the direction deemed to be most appropriate..AE = C + Ip + G with fiscal policy.

The effectiveness of fiscal policy – exogenous or endogenous.

Interest rates exogenous-treat most as exogenous then move as theory becomes more realistic
This indicates that effectiveness is related to Ye resulting from policy, among other things.
Why do both r and Y rise? Because now, Md is endogenous, which gives a mechanism by which changes in Y (which alter the real Md) cause interest rates to change.
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●     Variables
○     money supply, government spending, and tax rates
Interest rates endogenous- shortlist of endogenous variables
Higher interest rates then lower fund borrowing and fewer goods
Autonomous consumption (Ca ) depends on the interest rate,
2

The effectiveness of fiscal policy – exogenous or endogenous.

.  Fiscal policy alters AE and demand, thus impacting the IS (only) – Monetary policy entails altering the real money supply (Ms), so it only affects the LM curve
– Policy is effective if it can move the economy in the desired direction and by large amounts if desired. – This indicates that effectiveness is related to Ye resulting from policy, among other things.
Expansionary monetary or fiscal policy (both shift the AD curve)
Open economy (i.e., flexible exchange rates)
With two problems, growth and inflation, monetary policy can only help one problem while making the other worse.
Monetary and Fiscal Policy are only effective in fighting inflation when it is demand pull, since there is only one problem: too much demand. Contractionary policy can solve this.

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