Problem
Assume that the economy is currently at full employment with an inflation rate of 2 percent. The government embarks on a major new expenditure program that increases aggregate expenditures (assume that full-employment output is unaffected).
(a) If the central bank's policy rule remains unchanged, what will be the short-run and long-run effects on output and inflation of this change in fiscal policy? What will be the long-run effects on the real interest rate at full employment?
(b) Suppose the central bank's policy rule adjusts to reflect the change in the full-employment real interest rate. Will this alter the short-run or long-run effects of the fiscal expansion?
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.