Take an economy that has its output equal to its natural level but is facing
a fiscal budget deficit. The fiscal authority plans to lower government purchases to
reduce the deficit. The central bank wants to maintain output at the full-employment
level. Explain what the central bank can do to stabilize output. Use the Keynesian
Cross, IS-LM, and AS-AD models to explain your work in words and in figures.
Assuming that prices are perfectly sticky in the short-run, discuss the implications of
policy in the short-run and in the long-run.

Answer rating: 100% (QA)

In this scenario the economy is currently operating at its natural level of output but facing a fiscal budget deficit The fiscal authority plans to re... View the full answer