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Suppose the economy is currently in short run macroeconomic equilibrium at a real GDP level of $14 trillion. The full employm
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Answer #1

The full-employment level of GDP is $ 12 trillion while currently, the economy is operating at the level of $ 14 Trillion.

The economy is likely to face demand-pull inflation, thus government must go for the contractionary fiscal policy. Under this policy, taxes would be raised and expenditure would be cut down to put downward pressure on aggregate demand.

Following are actions

  • Reducing expenditure of the government.
  • Increasing taxes
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