Tut7(feb26) - income real interest rate and investment 3 In the following diagram the economy can move to full employment(Ybar by an expansion in

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Economics 291: Canadian Macroeconomic Policy Tutorial #7 (week of Feb 26) 1. The economy is at full employment. Now the government wants to change the composition of demand toward investment and away from consumption without, however, allowing aggregate demand to go beyond full employment. What is the required policy mix? Use an IS-LM diagram to show your policy proposal. 2. Consider two alternative programs for contraction. One is the removal of an investment subsidy; the other is a rise in tax (RE fails). Use the IS-LM model and the saving-investment diagram to discuss the impact of these alternative policies on
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Unformatted text preview: income, real interest rate, and investment. 3. In the following diagram the economy can move to full employment (Ybar) by an expansion in either money or deficit. Which policy leads to E1 and which to E2? How would you expect the choice to be made? Who would strongly favor moving E1 versus E2? Output, Y Real interest rate, r FE IS LM Y E1 E2 E Y0 4. An increase in government spending always leads to a move toward current account deficit in a small open economy. True/False. Explain....
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This note was uploaded on 10/12/2009 for the course ECON 291 taught by Professor J liu during the Spring '07 term at Simon Fraser.

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