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Unformatted text preview: 4. a. Suppose the economy begins at full employment. Then there is fall in consumer confidence. Using income-expenditure and AD-AS diagrams, show the immediate effects of the fall in consumer confidence. What will happen to the unemployment rate? b. Given your answer to part (a), what will happen to the economy over time? Illustrate your answer in an AD-AS diagram and explain the steps. c. Suppose the government wanted to take immediate action to restore the economy to full employment. Why might the government wish to take policy action rather than wait for the adjustment you described in part (b)? What fiscal policy options are available to the government to restore the economy to full employment? If the government takes the policy action you describe how will the economy compare over time to the situation you described in part (b)? 5. Redo question #4 under the assumption that consumer confidence increases....
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- Fall '09