SIMON FRASER ECON291 tut7 - 3 In the following diagram the...

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Economics 291: Canadian Macroeconomic Policy Tutorial #7 (week of October 26) 1. The right wing party is replaced by the left wing party in the general election. Suppose the economy is at the full employment. The left wing party wants a larger government, but does not want any change in employment and output. What is the required policy mix? Use an IS-LM diagram to show your policy proposal. 2. 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.
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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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