Suppose that fis determined by two factors: financial panic and asset purchases. Using an MP curve and
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Question:
Suppose that fis determined by two factors: financial panic and asset purchases. Using an MP curve and an AS/AD graph, show how a sufficiently large financial panic can pull the economy below the zero lower bound and into a destabilizing deflationary spiral. Using an MP curve and an AS/AD graph, show how a sufficient amount of asset purchases can reverse the effects of the financial panic depicted in part (a).
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