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Assume that economy is in recession and the government budget is in deficit. The government wants to stimulate the economy by increasing government purchases ((3).

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Assume that economy is in recession and the government budget is in deficit. The government wants to stimulate the economy by increasing government purchases ((3). Since the government budget is in deficit; government finances the government expenditure by borrowing from the money market (issuing new bonds). What is the likely effect of this fiscal policy on interest rates and aggregate demand? (4 marks, 80-100 words)

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