1. Suppose the government cuts transfer payments in an economy with an inflationary gap. How would...

1. Suppose the government cuts transfer payments in an economy with an inflationary gap. How would this policy affect bond prices, interest rates, investment, the exchange rate, net exports, real GDP, and the price level? Show your results graphically.

Expert Solution

if government cuts transfer payment with an inflationary gap. in an economy various variables get affection in a negative as well as positive way. so as we know an inflationary gap is a concept that describes a difference between current GDP and anticipated GDP at full equibrillium where economy is at full employment and therefore also known as potential GDP.

graphically it will affect the variables as such:

Rahul Sunny answered 2 years ago

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1. Suppose the government cuts transfer payments in an economy with an inflationary gap. How would...

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