Suppose you are given a one day task as an economic advisor to the prime minister. You will be given two current economic problems for suggestive solutions.
Problem-1: It is just a coincidence that economy is currently in recession. The prime minister has asked you to frame a policy package that will restore full employment without affecting the current account. Using the DD-AA model, describe a package of monetary and fiscal policies that will do the job. Model assumes that the country has a flexible exchange rate and the Marshall-Lerner condition holds.
Problem-2: The economy is in a recession, and you need to figure out how to get it out. The problem is, the economy is currently running large current account deficits, and so you do not want to make the current account deficit ‘worse’. Given this constraint, should you recommend monetary or fiscal expansion. Illustrate your answer with a graph if possible.