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5) According to the CBO, the output gap peaked at -8% during the current crisis. Using the IS-MP framework, show this as an aggregate demand shock.

5) According to the CBO, the output gap peaked at -8% during the current crisis. Using the IS-MP framework, show this as an aggregate demand shock.

6) Suppose that the authorities decide to attack the crisis with fiscal policy (∆ag) rather than with monetary policy. Suppose that the stimulus is equal to 4% of potential output. Show this change in an IS-MP diagram. What are some of the pros and cons of this response? 

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5. Aggregate demand shock means the IS curve shifts in. this is shown in the graph attached. please download it to check. 6.... View the full answer

aggregate demand shock curve..png

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