Expansionary monetary policy will have what effect on the ...

[V@ndy87]

Expansionary monetary policy will have what effect on the components of aggregate demand?
 
  A) Consumption, investment, and net exports will rise.
  B) Consumption will rise, but investment and net exports will fall.
  C) Consumption and investment will rise, but net exports will fall.
  D) Consumption will fall, but investment and net exports will rise.

Question 2

How does an increase in government purchases financed by an increase in the deficit affect exchange rates? Support your answer with graphs of the loanable funds market and the foreign exchange market.
 
  What will be an ideal response?

[14vl19]

Answer to Question 1

A

Answer to Question 2

An increase in government purchases financed by an increase in the deficit will reduce the supply of loanable funds, thereby increasing the interest rate. The increase in the interest rate will increase the demand for dollars (as capital inflows increase) and reduce the supply of dollars (as capital outflows decrease). Both the increase in the demand for dollars and the decrease in the supply of dollars will increase the equilibrium exchange rate, as shown below.

[V@ndy87]

Excellent

[recede]

TYSM