What are the effects of temporary decrease in govt spending

Reference no: EM13239576

Discuss, with the help of Krugman-Obstfeld-Melitz' AA- and DD-curves, the effects of a contractive fiscal policy (a decrease in government spending) on the interest rate, the nominal and real exchange rates, output and the price level!

a) What are the effects of a temporary decrease in government spending?

b) What are the effects of a permanent decrease in government spending? Distinguish between the short run (fixed price level, variable output) and the long run (variable price level, output at its equilibrium level).

Reference no: EM13239576

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