Blog: ECO403 - Macroeconomics GDB solution

What measures have been promised by the Finance Minister to cope up with the problem of inflation?

Keeping in view the Federal Budget of Pakistan 2010-11, what is the inflation 
rate of Pakistan? What measures have been promised by the Finance Minister 
to cope up with the problem of inflation? 
Note: 
Your answer should be based on Federal budget Of Pakistan 2010-2011.Give 
your answer in just 3 lines not more then that. 
Solution 
12.68% is Pakistan’s inflation rate. Finance minister promised to take certain actions to 
improve inflation rate.like 
• Reduction in custom duty will have positive impact on inflation. 
• Government expenditure reduction

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“Consider IS curve and LM curve in an open economy as explained in a Mundell Flemming model. By having expansionary fiscal policy, there is an increase in government purchase and the IS curve shifts towards right. There is no change in LM curve and it remains vertical. Due to the shift of IS curve, the interest rate and income level remains same but the exchange rate varies”.

Required:

Keeping in view of open economy in the above scenario, if the government want to use expansionary fiscal policy to increase the income level then it cannot do that, why?

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If the govt. want to use expansionary fiscal policy to increase the income level then it cannot do that, because there is no change in the interest rate it is given and the LM is vertical LM curve, if use expansionary fiscal policy only the exchange rate become high and the income level remains fixed

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so simple;
exchange rates increases and has no effect on income because it is fixed in an open economy of exploratory fiscal plicy.

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