⦁ Consider an economy where the potential output is equal to the...

Question

⦁ Consider an economy where the potential output is equal to the equilibrium output (i.e. Y(bar) = Y, and the country is running a budget deficit (i.e. G > T, Suppose that the households in this economy become very thrifty.

⦁ Using the IS-LM model, illustrate and explain what happens to r and Y due to increasing thriftiness.

⦁ If the government wants to stabilize output Y at its potential and balance the budget at the same time, illustrate and explain what combination of monetary and fiscal policies should be implemented.

Answer 1

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