Question: Suppose the current Italian administration decides to decrease government expenditures as a means of cutting the existing government budget deficit. a. Using a graph of

Suppose the current Italian administration decides to decrease government expenditures as a means of cutting the existing government budget deficit.

a. Using a graph of aggregate demand and supply, show the effects of such a decision on the economy in the short run. Describe the effects on inflation and output.

b. What will be the effect on the real interest rate, the inflation rate, and the output level if the European Central Bank decides to stabilize the inflation rate?

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