Question

In 2016, United Kingdom voted to leave the European Union. On Marsh 29, 2019 the Brexit AKA secession from the Union is schedule to take place. The referendum results and the approaching date of the secession have negatively affected business environment in the UK leading to a growth rate slowdown in the Kingdom. Explain how the Brexit ( and the expectation of the Brexit) affect   the U.S. economy. Using all the ISLM and ADAS diagrams illustrate the effect of the Brexit on the U.S. economy. Label all curves and axes. Write formulas for each of the curves what could the U.S. Central Bank do to stabilize the economy Illustrate its actions on ISLM and ADAS diagram. List all monetary policy tools (but do not explain how they work). Suppose the Central Bank does not take any actions. What could the U.S government do to stabilize the economy? Illustrate its actions on the ISLM and ADAS graphs (I Suggest drawing a new set of diagrams rather than using ones form (2)).

What happens to the interest rate monetary policy actions? What happens to the interest rate after fiscal policy actions? Explain the intuition for your result

Answer 1

Brexit effect has lead to significant plunge in exports to European Unipn and UK as the free trade agreements and comparative advantage have all been abolished. Moreover the job employment in EU now will decrease significantly. This will lead to higher recessionary curve and trade deficit  

As results the US Fed must decrease interest rate as monetary policy tool to adopt expansionary monetary policy which will lift economy from deflationary effect and recessionary curves.

US fed can use tools like Interest rates, Cash reserve ratio and Statutory liquidity ratio and Open market Operations for monetary policy.

If the expansionary fiscal policy is adopted with lower taxation and high government spending then the US Fed must equally support the direction of economy by adopting expansionary monetary policy which is reducing interest rates or buying government securities .

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