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The condition of Country X's economy is described in a news article as follows: Country X had been growing steadily at 4% per year for

The condition of Country X's economy is described in a news article as follows:

Country X had been growing steadily at 4% per year for the past five years with a 2% inflation rate and budget deficit of 2% of GDP. But this year has seen a sudden reversal of fortune. The economy shrank at a 3% annual rate in the first quarter, inflation fell to 0.5%, and the budget deficit increased to 4% of GDP. The increase in the deficit have led Faction Y in Parliament to demand tax increases and spending cuts to balance the budget.

You are given the task of advising Country X's government on macroeconomic policy and are to provide a policy brief that answers the following questions:

Is Country X's economy in long-run equilibrium? What shocks might it have recently experienced? If enacted, what impact would the changes in fiscal policy advocated by Faction Y have on the economy? In order to stabilize the economy, what macroeconomic policies should the government pursue? The central bank?

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