Question: Suppose that the goal of the fiscal authority is to
Suppose that the goal of the fiscal authority is to set government spending so as to achieve economic efficiency, while the goal of the monetary authority is to achieve stability of the price level over the long run. Assume that the economy is initially in equilibrium and that there is then a temporary decrease in total factor productivity. Show that there are many ways in which the fiscal and monetary authority can achieve their separate goals. What could determine what fiscal and monetary policy settings are actually used in this context? Discuss.
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