N1

FIXED ERR: Suppose that Policy Makers find that the economy is ABOVE full potential, and they want to use FISCAL POLICY to restore output back to the full-employment level of output (call this Y_bar). State the policy that will accomplish the goal and then analyze the impact of the policy on the economy under a fixed exchange rate answering the questions below.

a. Provide the YY-LL diagram to illustrate the impact; include the CA=xx curve. Label everything.

b. Provide a complete discussion of the impact on the economy. Make sure to discuss the intuition and to explain what is the impact on interest rate, output, Y, E, employment, foreign reserves, CA, KA, EX, IM, and C. Discuss.