Question
3. The economy in the USA is in a recession with a balanced budget, with real GDP $100 billion below full employment output and a
3. The economy in the USA is in a recession with a balanced budget, with real GDP $100 billion below full employment output and a MPC of .75.
a - What would happen to SRAS in the long run if the government did not take any fiscal or monetary action? Explain.
b- Now suppose the Federal bank wants to pursue monetary policy to close the gap, what open market operation should they use?
c - If the government chose to do fiscal policy instead of monetary policy to close the gap, how much would each of the following need to change: (be sure to show your calculations)
i - government spending
ii - taxes
d - What impact would the fiscal policy changes in part c have on the real interest rate? Explain.
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