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Unformatted text preview: (3) [21 Marks] Question 3 Using a diagram of the AS-AD model, explain what happens in the short and medium run when the government pursues an expansionary fiscal policy. (20) [20 marks] Question 4 Using a diagram of the AS-AD and IS-LM models, explain what happens in both the short and medium run when the central bank pursues a contractionary monetary policy. [30 marks] Question 5 (Not required for hand-in) Assume that the closed economy of Banaland is currently in recession (output is below the natural level). Fiscal and monetary authorities have decided that an expansionary stance is needed to bring an end to the recession. However, they are also concerned that the interest rate does not increase since this will have adverse effects on investment. Discuss the short and medium run effects of the appropriate actions that the government and the central bank should take using both IS-LM and AS-AD models. [30 marks]...
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This note was uploaded on 05/23/2011 for the course ECON 203 taught by Professor Jules during the Spring '11 term at University of Cape Town.
- Spring '11