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Offsetting fiscal policy with monetary policy

Consider that the:
The multiplier =3
the money multiplier = 6
income multiplier with respect to the money supply = 4

The government increase spending by 12 billion but because the economy is operating at full capacity it wants to use monetary policy to offset the impact of this increase will have on income.

a) does the central bank need to buy or sell bonds to offset this fiscal policy?
b) how many bonds must the monetary authorities buy or sell to accomplish this end?

Solution Preview

a) does the central bank need to buy or sell bonds to offset this fiscal policy?
The money supply needs to be tightened to offset a looser fiscal ...

Solution Summary

Use of monetary policy when the economy is at full capacity.

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