The role of contractionary fiscal policy and contractionary monetary policy on the interest rate.

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Chapter 27, Problem 2.5P

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The role of contractionary fiscal policy and contractionary monetary policy on the interest rate.

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Suppose that the government decides to increase government expenditure. a) Is this a fiscal or a monetary policy? b) Is this an expansionary or a contractionary policy? c) How will the equilibrium output and interest rate change in goods and money markets, respectively. Explain using the diagrams.

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