32. Monetary policy at the fixed exchange rate

Increases in the public expenditures are caused by growth of cumulative demand – the curve of IS moves before the situation IS2 (a) to the right. It is visible that the income as a result grows and with it the percent rate increases to r1 because the increase in the income increases demand for money. At the same time, higher interest rate attracts the foreign capital that leads to formation of active balance of the account of the capital and in general the balance of payments to the country.

33.Fiscal policy at the fixed exchange rate

The increase in the offer of money means shift of curve LM before the situation LM2 (a) to the right. The interest rate decreases, stimulating expansion of investments and increasing thus the income. At the same time , reducing the domestic interest rate lower than the world r1 < r * (a) leads to an outflow of capital from the country , and a deficit of the balance of payments .

10.

11.

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