Economic Theories, Fiscal and Monetary Policies

Synthetis Model

a) Policies of demand (in this analysis we are going to suppose that we are in a situation of full employment).

Monetary Expansion: in the very short terms its effects are similar to those found in the Keynesian model (decrease in interest rates, increase in production and decrease in unemployment).

In the longer term, the displacement of the Aggregate demand means a gradual increase in prices.

In the long term the gradual increase in prices will accelerate, displacing Monetary offer to the left so that it returns to its starting poing, with an increase again with interest rates and a reduction in investments. In short, in the long term the monetary expsansion only translates to an increase in prices, without effecting the level of production or employment.

Fiscal Expansion: in the short term the Aggregate Demand moves towards the right, causing an increase in the level of production and employment. .

Slowly prices increase (direct result of the strong demand), as a result the Monetary Offer moves towards the left, causing an increase in interest rates and a progressive fall in investments.

The end result is a level of production equal to the start, increased prices and interest rates and a lower level of investments (the expulsion effect is produced: the public expenditure grows at the expense of private investment).

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