Figure 13.3 Panel (a) Panel (b) -Refer to Figure 13.3.If exchange rates are floating,an expansionary fiscal policy and the typical central bank response to the change in inflation caused by the fiscal policy would best be represented by a movement from ________ in panel (a)and a corresponding movement from ________ in panel (b). A) point A to point D; point X to point Y B) point C to point B; point X to point Y C) point D to point A; point Y to point X D) point B to point C; point Y to point X

Question

Quizplus · Accepted Answer

According to the diagram, an expansionary fiscal policy would shift the IS curve to the right from point D to point A in panel (a). This would cause an increase in output (Y) and an increase in the interest rate (r). The central bank typically responds to an increase in inflation caused by the fiscal policy by increasing the interest rate. Therefore, in panel (b), the LM curve would shift up from point Y to point X, indicating a higher interest rate. The combination of the shifts from point D to point A in panel (a) and from point Y to point X in panel (b) is best represented by choice C.

Figure 13.3 Panel (A) Panel (B)