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In: Economics

Because of the ongoing pandemic, output has declined below its long-run equilibrium. The government is then...

Because of the ongoing pandemic, output has declined below its long-run equilibrium. The government is then interested in pushing output back to its original level. Using the Keynesian Cross and IS-LM, demonstrate how output and the real interest rate changes from the short-run to the long-run if the government implements policy that raises output back to its full-potential.

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Expert Solution

as economy falls short of potential output this implies that the economy is facing recession which means there is shortage of aggregate demand. the government can use expansionary monetary policy or fiscal policy to bring the economy back to the full employment level of output.

I have shown expansionary monetary policy.

Rahul Sunny answered 2 years ago
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