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Question 2: Suppose the country of Sokovia is currently in an inflationary output gap. The federal government has hired you to help advise it on

Question 2:

Suppose the country of Sokovia is currently in an inflationary output gap. The federal government has hired you to help advise it on how it can use fiscal policy to close this output gap.

  • Why is an inflationary output gap negative for the country?
  • What can the federal government of Sokovia do to close this output gap?

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