The monetary authority has announced plans to reduce the money supply. The fiscal authority wants to maintain output at the full-employment level. Explain what the fiscal authority 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.

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When the monetary authority plans to reduce the money supply it can lead to a decrease in aggregate ... View the full answer