Question
Looking for answers to this question! To help deal with the effect of Covid, the Government of Ecoland undertakes a major capital spending (infrastructure) program
Looking for answers to this question!
To help deal with the effect of Covid, the Government of Ecoland undertakes a major capital spending (infrastructure) program totaling$250 billion. To finance the spending, it sells$200 billion of new government bonds to the central bank and $50 billion to the public. The banking system of Ecoland has a desired reserve ratio of 8%.
a. Using balance T-accounts for the Public, Commercial Banks, and the Central Bank, show the effect of the above policy on the money supply. Assume no cash drain.
b. Prior to the capital spending program, Ecoland was in equilibrium at less than full employment. Draw an AD-SRAS diagram, show the initial equilibrium.
c. What is the effect of only the infrastructure program on equilibrium GDP? Explain briefly in words and show graphically.
d. Does the way the government finances the program have any additional effects on the equilibrium? Explain and show graphically.
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