Short Answer

The country of Southland is facing a recessionary gap caused by a drastic decline in Aggregate Demand.

a) [3 Marks] Draw two diagrams, one representing Southland's current Aggregate Demand-Aggregate Supply position and one representing the country's Aggregate Expenditure position.

b) [4 Marks] In response to the recessionary gap, Southland's Central Bank decides to cut interest rates. Draw two new diagrams for the Aggregate Demand-Aggregate Supply and Aggregate Expenditure positions after the changes in monetary policy.

c) [3 Marks] When deciding to use monetary stimulus, what factors should the central bank consider?