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1. The interaction of balanced budgets and economic fluctuations Suppose the constitution of the country of Bonstia requires a balanced budget and that current fiscal policies yield a balanced budget when output is at potential GDP. now that output in Bonstia rises above potential GDP. In order to maintain a balanced budget without changing taxes, the government would Suppose have to cut expenditures The following graph shows the aggregate demand (AD) and short-run aggregate supply (AS) curves for the economy of Bonstia after the rise in output, but before the change in expenditures. The vertical green line shows the economys potential GDP shift one of the curves on the graph to illustrate how the change in expenditures will impact the economy. AS Potential GDP AS AD AS REAL GDP True or False: The constitutional requirement to have a balanced budget has caused output in Bonstia to rise even further above potential GDP

Options: Rise/Cut expentidures

See T/F at the bottom.

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