1. (a) Consider a situation where current output (real GDP) is currently above potential GDP. What type of fiscal policy will the government use to get to potential GDP? Draw an AD-AS diagram to illustrate this situation (including the initial situation). Explain the figure in some detail. By this, we mean do not just explain the changes in the diagram, but also state what components of the AD and AS curves are changing (if any), and in which direction.

(b) Briefly explain if the existence of a fiscal multiplier would help the government in terms of its spending commitments to reach full employment output?

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Fiscal Policy to Reach Potential GDP a Fiscal Policy and ADAS Diagram Scenario Current output is above potential GDP Policy The government will implement a contractionary fiscal policy to decrease agg... View the full answer