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Decide to attack the crisis with fiscal policy

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Reference no: EM131934705

1. According to the CBO, the output gap peaked at -8% during the current crisis. Using the IS-MP framework, show this as an aggregate demand shock.

2. Suppose that the authorities decide to attack the crisis with fiscal policy (?ag) rather than with monetary policy. Suppose that the stimulus is equal to 4% of potential output. Show this change in an IS-MP diagram. What are some of the pros and cons of this response?

Reference no: EM131934705

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