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    If the government increased its expenditures and reduced taxes, how would this policy affect the real output and the price level in the short run if the economy is:
    1. experiencing 20% unemployment rate
    2. experiencing mild recession
    3. at the real output level

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    Solution Preview

    Please see attached file.

    Both increasing in government spending and reduction in taxes are expansionary fiscal policies.

    1. When the unemployment rate is as high as 20%, the economy is in a recession. The potential real output level (where unemployment rate = 0) has not been reached. When there is an expansionary fiscal policy, the increased aggregate demand will encourage the aggregate production and increase the real output. On the other hand, according to Phillips Curve, a high-unemployment rate is associated with a low inflation rate, i.e., the ...

    Solution Summary

    The aggregate supply is assessed.