Question

initially Y=Yn , π =π(-1) and goverment decides to reduce the budget deficit by decreasing government spending.The central bank decreases the policy rate so as to increase output back to potential and realese the deflation ;1) illusturate the short-run and medium-run equilibria using relevant graphs when the zero lower bound is NOT binding.?
2) ıllustrate the short-run and medium-run equilibria using relevent graphs when the zero lower bound is binding.

Answer 1

1)

2)