The economy is in a recession. The government increases spending in an effort to move the economy
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Question:
- The economy is in a recession. The government increases spending in an effort to move the economy toward full employment (Y*). Money demand is interest sensitive and investment is interest insensitive.
- explain each step of the adjustment process,
- graph the process (show both “the crowing out” and the path –process– the economy will follow).
- How much crowding out would you expect relative to an economy wherein Money demand is interest insensitive and investment is interest sensitive and why.
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