Question

A small and open country is described using the following two equations:

Y = C Y – T) + I (r* ) + G – N X(e) -------------------------------1

M/P = L(r*, Y) ------------------------------------------------------------------------------2

a. If the country described above suffers from a recession, should the state government use

monetary or fiscal policy to stimulate employment? Why? (8 Marks)

Answer 1

a. If the country described above suffers from a recession, then the state government should use either

monetary or fiscal expansionary policy to stimulate employment.