Name: Aman Jain Roll No.

: PGP13018 Section: A

MEB
What should Ben do?

Currently, Ben is facing three problems which are:

1) Increasing oil prices

2) Decreasing housing prices
3) Higher budget deficit

And the central bank and the Government is following expansionary monetary and fiscal policy.

Analysis:

As oil prices are increasing IS curve is shifting towards the left, and the LM curve is also shifting
towards the left. This will reduce the output of the economy, and its effect on the interest rate will
remain uncertain.
Name: Aman Jain Roll No.: PGP13018 Section: A

As housing prices are declining, IS curve is shifting toward the left, and the LM curve is shifting
toward the right. This will reduce the real interest rate in the economy, but its effect on the output
will remain uncertain.

As per the above analysis, as the governor of the US federal reserve, Ben should avoid the
expansionary monetary policy as this will allow the effect of oil prices on the IS curve to be
countered by the impact of housing prices on IS curve. Here as the government is following the
expansionary fiscal policy, this will help in shifting IS curve to the right. So, In this way, the output
will also remain constant.