Question 2 Assume that an economy produces at the natural level of output (Y,). Using both the IS-LM apparatus and the AD-AS model, consider the
Question 2 Assume that an economy produces at the natural level of output (Y,). Using both the IS-LM apparatus and the AD-AS model, consider the impact on aggregate income, interest rates and price level of an increase in the size of a government's budget deficit. Explain in detail the short-run and medium-run effects of this policy. [50 marks]
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