Author Question: If Congress and the president pursue an expansionary fiscal policy at the same time as the Federal ... (Read 113 times)

acc299 · **on:** Jun 29, 2018

If Congress and the president pursue an expansionary fiscal policy at the same time as the Federal Reserve pursues an expansionary monetary policy, how might the expansionary monetary policy affect the extent of crowding out in the short run?

What will be an ideal response?

Question 2

Japan has a fairly high saving rate and the level of saving in Japan is above domestic investment. Use the saving and investment equation to explain what Japan is doing with this excess of saving above domestic investment.

What will be an ideal response?

memslove · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

An expansionary fiscal policy will cause the equilibrium rate of interest to increase. An expansionary monetary policy will cause the equilibrium rate of interest to decrease. An expansionary monetary policy will therefore lessen the effect of crowding out in the short run.

Answer to Question 2

In an open economy, the saving and investment equation implies that a country's national saving must always equal domestic investment plus net foreign investment or (S = I + NFI). Japan's saving in excess of domestic investment implies that net foreign investment is positive for Japan so that Japan must be investing in other countries. Companies like Toyota, Honda, and Nissan have built plants in the United States.