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The current crisis, which started in the housing and financial sectors, has now led to a strong fall in aggregate demand. There are indications that this fall could be larger than in any period since the Great Depression. A successful policy package should address both the financial crisis and the fall in aggregate demand, and thus, should have two components: one, aimed at getting the financial system back to health; the other, aimed at increasing aggregate demand. There are obvious interactions and synergies between the two. Financial measures, from recapitalization to asset purchases, have important implications for credit flows and aggregate demand.
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