What happens to the aggregate demand curve in Parts A and B?

Assume that the British economy is a closed economy. In 2010 the British government proposed reduci Show more Assume that the British economy is a closed economy. In 2010 the British government proposed reducing the British budget deficit by increasing net taxes and reducing government spending. Some economists claimed that this policy would reduce interest rates and increase real GDP as well as cut the deficit. A. Draw IS-LM graphs to analyze the effects of this mix of fiscal policies on the deficit interest rates and real GDP in the short run. (Assume that taxes are lump sum that is taxes are an absolute amount that is unrelated to the level of income.) Are these results consistent with the economists predictions? B. Most economists who believe that an increase in taxes and a reduction in government spending would both increase real GDP and cut the government deficit implicitly assumed that the Bank of England (the British central bank) would change its monetary policy if this deficit-reduction plan were enacted. Draw IS-LM graphs to show what kind of monetary policy must accompany this mix of fiscal policy changes in order to decrease the deficit and interest rates while increasing GDP in the short run. C. What happens to the aggregate demand curve in Parts A and B? Show less

QUICK QUOTE

Approximately 250 words