Question

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Answer 1

a) Market of loanable funds- Expansionary fiscal policy increases the deficit. So, the government must borrow more and demand for loanable funds will increased led to higher interest rates. Expansionary monetary policy will increase supply of loanable funds which to lower interest rates and increase in the volume of credit. Combined effect on interest rate will depend which one shift is greater but there be increase in supply of credit.

b) Foreign Exchange market- Expansionary fiscal policy led government lowers your taxes through fiscal policy so it puts more income with people so demand for imports will increase and led to more selling of currency and hence depreciate domestic currency. Expansionary monetary policy will increase Money available with people and hence demand for imports will increase and led to more selling of currency and hence depreciate domestic currency.

c) NCO - An expansionary fiscal policy may put upward pressure on interest rates. This rise would tend to lead to capital inflows. An expansionary monetary policy led to increase in the money supply causes interest rate to fall. This led to  decrease in international capital flows. Foreign investors will be less likely to place their capital in the domestic capital markets and domestic investors would be more likely to place their capital in foreign capital markets.

d) Trade balance in economy - An expansionary fiscal policy in the form of an increase in government expenditures or a reduction in taxes will led to budget deficit and hence trade deficit. similarly due to  Expansionary fiscal and monetary policy led to increase in imports so there will be increase in trade deficit.