What are the components of fiscal policy? Explain how fiscal ...

[neverstopbelieb]

What are the components of fiscal policy? Explain how fiscal policy affects aggregate demand.
 
  What will be an ideal response?

Question 2

What role can the Fed play in the foreign exchange market?
 
  What will be an ideal response?

[ankilker]

Answer to Question 1

Fiscal policy affects aggregate demand through government expenditure, transfer payments and taxes. Because government purchases are a component of total spending, a change in government expenditure directly changes aggregate demand. A change in transfer payments changes disposable income which, in turn, changes consumption expenditure and aggregate demand. Finally, taxes alter disposable income and thus impact consumption expenditure and aggregate demand.

Answer to Question 2

The Federal Reserve can intervene in the foreign exchange market by (temporarily) selling or buying dollars. If the Fed sells dollars, it drives the exchange rate lower and if the Fed buys dollars, it drives the exchange rate higher. The Fed cannot buy dollars forever because it will run out of the foreign exchange it using to buy the dollars. And, the Fed likely will not want to sell dollars forever because it would accumulate ever increasing amounts of foreign exchange.

[neverstopbelieb]

TYSM

[Dinolord]

Gracias!