Assume the natural rate of unemployment

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Assume that b=1/2 and that initially the real interest rate is equal to the marginal product of capital at 3%. As well, assume that v=2 and that the inflation rate last period was 2%. Assume the natural rate of unemployment is 5.5%.

a. The Sequester is probably a bad idea. Use the IS-MP model to explain what should happen to the economy if the government cuts spending by 1 percentage point of potential GDP.

Reference no: EM13741690

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