A Fall In Consumer Confidence On An Open Economy Is-Ilm Model

907 Words 4 Pages
This essay has been split into three sections. The first section intends to highlight the short-run effects, of a fall in consumer confidence on an open economy IS-LM model. The second section will consider the impact of a monetary-fiscal policy mix on an economic climate that is suffering from a recession. The third section aims to analyse the United Kingdom between 2009-2014, and how the country dealt with the economy whilst being in a liquidity trap.
Firstly, an open economy can be defined as an economy that buys and sells from the rest of the world (Blanchard et al, 2013:109). In the short-run, a fall in consumer confidence leads to a decrease in output thus, shifting the IS curve to the left, consequently this causes the interest rate
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Firstly, the expansionary fiscal policy, this consists of the government increasing their spending or decreasing taxes (Blanchard et al, 2013:92). Therefore, the fiscal policy will result in an increase in output thus, shifting the IS curve to the right. As a result of the increased government spending, the interest rates will increase and so will the real exchange rate (see Figure 3). Moreover, there will also be an increase in consumption as consumers will have more disposable income due to the decrease in taxes. One could argue that, the effect on the investment is unambiguous as the factor relies not only on interest rates but sales as well (Blanchard et al, 2013:93). In addition to that, the increase in output and interest rates will result in the trade balance …show more content…
It could be argued that the United Kingdom has suffered from a liquidity trap between 2009 and 2014 (see Figure 5). Thus, the Bank of England opted for an expansionary fiscal policy and, an extreme form of expansionary monetary policy, which is known as quantitative easing (Blanchard et al, 2013:412). One could argue that, a normal expansionary monetary policy will be powerless due to the extremely low interest rates, as consumers will prefer to hold more money (Blanchard et al, 2013:97). The combination of the expansionary fiscal policy and quantitative easing led to an increase in money supply within the economy. Thus, increasing the output, this can be seen in figure 6 as, GDP is steadily increasing after the initial drop in

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