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Suppose the Denmark economy is pushed by a shock above its full employment level of output,...

Suppose the Denmark economy is pushed by a shock above its full employment level of output, and the government wants to take some contractionary policies to tame the boom. Finally it decides to decrease its government spending. Analyze the effects of this policy using an IS-LM-FX model. Notice that Denmark has a fixed exchange rate against Euro. (6 pts)

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Decrease in government expenditure is a part of contractionary fiscal policy.

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