1. Currently there has been considerable debate in Canada about the fiscal deficit. Now let's assume...

 

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1. Currently there has been considerable debate in Canada about the fiscal deficit. Now let's assume that the government spending will be reduced in the future. Using the market- clearing Real Business Cycle model framework, illustrate how the economy would respond today to an expected reduction in future government spending. Explain how output, employment wages, interest rates, and the price level respond. 1. Currently there has been considerable debate in Canada about the fiscal deficit. Now let's assume that the government spending will be reduced in the future. Using the market- clearing Real Business Cycle model framework, illustrate how the economy would respond today to an expected reduction in future government spending. Explain how output, employment wages, interest rates, and the price level respond.

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In the Real Business Cycle RBC model the economy is driven by exogenous technological shocks and changes in productivity However government spending c... View the full answer