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Answer each of the following questions. Use a graphical explanation if it is stated and explain each step of your answer. Answers without an explanation will lose points. a) (4 pts) Suppose the government executes an expansionary fiscal policy. By using the AS-AD graph explain under which conditions an expansionary fiscal policy works well and under which conditions it does not work well. Explain each step in your answer. b) (3 pts) Explain the crowding-out-of-investment of a decrease in the tax rate. c) (4 pts) When there is a binding situation for the interest rate, graph the Aggregate demand (AD) curve and explain the shape of the AD curve. d) (4 pts) Suppose central bank applies inflation targeting. What would be the central bank’s interest rate response if there is an increase in output (Y)? Graph the Aggregate demand (AD) curve and explain the shape of the AD curve.
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