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Unformatted text preview: 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? Output, Y Real interest rate, r FE IS LM Y E1 E2 E Y0 4. Consider two alternative programs for expansion. One is an investment subsidy; the other is a cut in tax (RE fails). Use the IS-LM model and the saving-investment diagram to discuss the impact of these alternative policies on output level, real interest rate, and investment. What is the difference between these two policies in terms of the composition of GDP?...
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- Summer '07
- J Liu