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Unformatted text preview: DRAW IT OUT (MS shifts, MOVEMENT along MD) At equilibrium (money market), in recession, no monetary policy occurs. What happens? Aggregate spending decreases, shifting MD down, driving rates down. This increases investment and brings AD up to close the recessionary gap. Budget shouldn't be balanced. It should be averaged (allow deficit in recession to be countered by surplus in good years). A balanced budget rule undermines automatic stabilizers. When entering a recession, the govt. wouldn't be able to cut taxes and increase transfers to limit the size of the recession. Instead, they'd be using contractionary fiscal policies that would deepen the recession....
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This note was uploaded on 12/06/2009 for the course BCOR 1010 at Colorado.