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)?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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