Answer to Question #63320 in Macroeconomics for Olivis Heyno

Question

How can I graphically show how a combination of fiscal and monetary policies could be used to reduce output without changing the interest rate?

Answer 1

We should use such combination of fiscal and monetary policies, for which taxes will be decreased, government purchases will be decreased and the decrease in money supply may be used too to reduce output without changing the interest rate. In this case aggregate demand will decrease (AD curve will shift to the left), so the total output will decrease.