farooq7
Mar 15th, 2008, 04:03 AM
Ok so lets say the government decreases government expenditure, what will happen to investment, interest rates etc...
My thought is that as government expenditure decreases Their will be a negative or reccesionary gap from potential output intially. However As Gov expenditure decreases so will interest rates which will drive up investment and thus bring the Aggregate Expenditure function up and shift the ad curve so it stops the Reccesionary gap. Also by a lower interest rate people from other countries will not want to purchase are bonds due to a lower bond yield so they will not demand canadian dollars which will decrease our dolloar. This will further increase AD and AE because Net exports will go up because it will be cheaper for countries to purchase from us and they will also go up because we will not be importing because its more expensive for us. * Net exports equals (Exports - Imports). I also think assuming that the wage adjusment model work and wages are not sticky downwards the AS curve will also shift causing a shift too the right thus closing the gap. What my argument rests on is pretty much if interest rates go down when gov expenditure goes down... Is this correct or not?
My thought is that as government expenditure decreases Their will be a negative or reccesionary gap from potential output intially. However As Gov expenditure decreases so will interest rates which will drive up investment and thus bring the Aggregate Expenditure function up and shift the ad curve so it stops the Reccesionary gap. Also by a lower interest rate people from other countries will not want to purchase are bonds due to a lower bond yield so they will not demand canadian dollars which will decrease our dolloar. This will further increase AD and AE because Net exports will go up because it will be cheaper for countries to purchase from us and they will also go up because we will not be importing because its more expensive for us. * Net exports equals (Exports - Imports). I also think assuming that the wage adjusment model work and wages are not sticky downwards the AS curve will also shift causing a shift too the right thus closing the gap. What my argument rests on is pretty much if interest rates go down when gov expenditure goes down... Is this correct or not?