Question 4In connection with the corona crisis, many countries have announced fiscal stimulus to support a recovery of the economy to its natural (medium) equilibrium. Use the AS-AD model to answer the following questions:

a) What is happening in the economy in the short and medium term, provided that the scope of the stimulus is just as large as is needed to bring the economy to its natural equilibrium.

b) In the United States, the new administration has announced a particularly large recovery package. Assume that it is larger than what is needed to bring the economy to its natural equilibrium. Explain what happens then in the short and medium term.