Keeping the economy from falling into a recession

How can the Fed keep the economy from falling into a recession if the budget deficit is reduced? Use the IS–LM model to:

Explain which curve will shift when the fiscal authority reduces the budget (by reducing spending or raising taxes), then explain what the Fed can do to avoid a recession (which curve it can/should shift?).
What is long the run effect on prices of the two shifts you discussed in a? Will prices be higher or lower or stay the same? Will output be higher or lower or stay the same? (You can use the AD/AS framework to answer this)

Sample Solution

ACED ESSAYS