Suppose an Aggregate Demand Shock Has Led to a Recession

question 199

Essay

Suppose an aggregate demand shock has led to a recession.The government decides to use either monetary policy or fiscal policy to deal with the recession.Which policy tends to be more effective in an open economy: monetary policy or fiscal policy? Explain your answer.

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Definitions:

Absolute Advantage

The ability of an individual, company, or country to produce a good or service more efficiently than competitors, using fewer resources.

Opportunity Cost

A different way to describe it would be the cost of missing out on the benefits of the second-best option when a choice is made.

Production Possibilities Frontier

A curve depicting all maximum output possibilities for two goods, given a set of inputs and technology, demonstrating the concept of opportunity cost.