Suppose initially that inflation is at the central banks target and the output gap is zero. Then,
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Suppose initially that inflation is at the central bank’s target and the output gap is zero. Then, government spending goes down. Deter-mine, with the aid of diagrams, how the degree of price stickiness affects the central bank’s optimal response, and explain your results.
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Initially equilibrium is at point A with output at its efficient level Y 1 and inflation at the infl...View the full answer
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