Question

3. Suppose a country targets an income level of Y ∗.

(a) Demonstrate, using graphs, that either fiscal or monetary policies

can be used to achieve the targeted level of income.

(b) What are the possible reasons for a country to opt for a particular

policy (fiscal or monetary) while both of them can yield similar

level of income?

Answer 1

a)

2)The following are the reasons why the government would prefer one policy to the other;

Effect on the economic growth

Technical limitation of a policy

Effect of the policy on inflation