Use the IS/LM model with rigid prices to answer these questions. 1. Suppose that the United Kingdom is initially at full employment. However, the British government implements "austerity" policies to reduce its budget deficit. That is, it reduces expenditures and raises taxes. a. How would this policy affect British income and interest rates? Depict it graphically. b. If the Bank of England wanted maintain full employment, what kind of monetary policy would it implement? Depict it graphically. c. What is the net effect of this policy mix on income and interest rates? d. If the UK were in a liquidity trap, what would happen to its income and interest rates?

Use the IS/LM model with rigid prices to answer these questions. 1. Suppose that the United Kingdom is initially at full employment. However, the British government implements "austerity" policies to reduce its budget deficit. That is, it reduces expenditures and raises taxes. a. How would this policy affect British income and interest rates? Depict it graphically. b. If the Bank of England wanted maintain full employment, what kind of monetary policy would it implement? Depict it graphically. c. What is the net effect of this policy mix on income and interest rates? d. If the UK were in a liquidity trap, what would happen to its income and interest rates?

Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter27: Issues In Macroeconomic Theory And Policy

Section: Chapter Questions

Problem 4P

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