Answer to Question #146781 in Macroeconomics for .

Question

The monetary transmission mechanism can be depicted in the form of a graph or using symbols.
Explain, with the aid of symbols, the monetary transmission mechanism when interest rates increase
(Note: Prices and wages are variable.)
(10)
Q.3.2
Explain, using the AD‐AS model, how the South African Government can use fiscal policy as a tool to recover from the negative effects of this COVID‐19 pandemic.
Your answer must include the following:
 The description of the type of fiscal policy required; (4)
 An explanation of how the implementation of this tool will work their way
through the economy to achieve the desired effect; (6)
 The AD‐AS graph showing the implications of your recommendations. (5)
Marks will be awarded for your ability to integrate theory with the scenario

Answer 1

Interest rates (i↑) → money supply (M↓), reserve requirement (rr↓) →loanable funds rate ↑, money demand ↓ → Investment spending (I↓) → Aggregate demand (AD↓), Output (Y↓), unemployment (u↑) → Inflation (ℼ↓).

Q 3.2

The South African Government can use expansionary fiscal policy as a tool to recover from the negative effects of this COVID‐19 which mean the existence of a recessional gap.

Expansionary fiscal policy includes tax cuts, additional transfer payments, rebates and increased government spending on projects such as infrastructure improvements to provide people and businesses with more money. These actions will stimulate consumption and investment spending, so the aggregate demand and total output will increase, the long run aggregate supply and potential output levels will be reached, as a result the recessional gap will be closed.