Internal Balance (GDP) BAN ON A Output Gap (%GDP) 2000 2005 2010 2015 2020 Fiscal Policy N 0 Budget Balance (%GDP) -4 2000 2005 2010 2015 2020 Monetary Policy 100 3 2 ECB Deposit Facility Asset Purchases in Billion E 50 O 0 2005 2010 2015 2020 Figure 2: Answer to 5g) c) When comparing the fiscal and monetary policy between 2012 and 2019, would you say this is a consistent or inconsistent policy mix? If it is inconsistent, why would officials in the European Union have chosen to implement it? d) According to the graph the output gap was negative up until 2016 meaning that the the euro area economy did not grow enough for a long time after the financial crisis and during the European debt crisis. As a policy maker, would you have implemented a different fiscal or monetary policy that could have increased output as a direct effect (and hence allowed for a faster recovery from the crisis)? Refer to Table 17.1 of the slides/textbook to explain your policy. e) Looking at the fiscal and monetary response to the Covid-19 pandemic, would you say that the policy mix is consistent?Problem 6. Combination of Fiscal and Monetary policy. (18 pts)) Figure 6 provides actual data on the euro area from 2001 until today (the values for 2021 and 2022 are forecasts). The rst panel plots the socalled output gap. It is a measure indicating how the economy deviates from its potential output - comparable to the textbooks notion of full employment output level. Positive values indicate that the economy is doing good, e.g. is in a boom. Negative values indicate that the economy is doing bad, e.g. is in a recession. From the graph we can see that the euro area went through two major crises: (i) the European debt crisis that emerged from the nancial crisis starting from 2008 and lasting until approximately 2016 and (ii) the crisis caused by the Covid-19 pandemic starting in 2020. Panels (2) and (3) graph the aggregate scal policy (measured by the government budget balance) and monetary policy by the European central bank. These are basically two instruments: the deposit facility (right scale) which is the interest rate at which banks can lend to each other overnight and monthly asset purchases (left scale) which are mainly containing the purchase of government bonds. Please answer the questions below. a) Describe the scal response of the Euro area during the European debt crisis. When was it expansionary? when was it contractionary? How did the euro area respond to the Covid19 pandemic? b) How did the European Central Bank adjust the deposit facility rate in response to the European debt crisis? Does this reect expansionary or contractionary monetary policy? In late 2014 the European Central Bank intensied their monetary policy by buying large amounts of government bonds (the socalled quantitative easing). Do these asset purchases reect expansionary or contrac- tionary monetary policy