Question

(a)Inflation in Theoretica is currently below the target range of its central bank. What does this tell you regarding Theoretica's likely output gap? Illustrate it using an AS-AD diagram, and briefly explain your diagram

(b)Your mother states that lowering interest rates in the recessionary COVID-19 period is good policy because it will guarantee consumers will spend more as it is cheaper to borrow money. Do you agree or disagree with her statement? Provide two reasonings to justify your answer.

(c)Is either helicopter money or quantitative easing preferred in times of severe recessions in order to boost economic activity? Briefly explain your reasoning.