Suppose that the Central Bank (CB) decides to respond immediately to the decline in the reduction of government expenditure in the short run. In particular, suppose that the CB wants to prevent the unemployment rate from changing in the short run after the government reduced the fiscal deficit. a. What should the CB do? Show how the CB's action, combined with the decline in government expenditure, affects the AS-AD diagram in the short run and the medium run. b. How do short-run output and the short-run price level compare to your answers from part (a)? c. How do the short-run and medium-run unemployment rates compare to your answers from part (b)?

Suppose that the Central Bank (CB) decides to respond immediately to the decline in the reduction of government expenditure in the short run. In particular, suppose that the CB wants to prevent the unemployment rate from changing in the short run after the government reduced the fiscal deficit. a. What should the CB do? Show how the CB's action, combined with the decline in government expenditure, affects the AS-AD diagram in the short run and the medium run. b. How do short-run output and the short-run price level compare to your answers from part (a)? c. How do the short-run and medium-run unemployment rates compare to your answers from part (b)?

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter24: The Aggregate Demand/aggregate Supply Model

Section: Chapter Questions

Problem 59CTQ: Review the problem in the Work It Out titled Interpreting the AD/AS Model. Like the information...

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