Problem: The New Zealand economy is operating at potential output level. The government increases, its spending on roads and infrastructure.
Use the AS-AD model to explain the short-run impact of the increase in government purchases on real GDP, unemployment rate, the price level and interest rate.
What type of monetary policy could the Bank of New Zealand implement to return the economy to long-run equilibrium? Use the AD-AS diagram to explain and illustrate how the policy would impact the economy.