1. Suppose that the economy can be described by a closed-economy IS-LM framework
and that is in a recession. If you were to advise the policymakers on which action
to take, what would be your advice? Explain and show graphically how monetary
and fiscal policies can be used in this case.
2. Consider an economy that is characterised by the following set of equations:
C = c0 + c1YD
YD = Y − T
I = b0 + b1Y
Government spending (G) and taxes (T) are constant. Note that the investment (I)
is proportional to output (Y ).
(a) Solve for equilibrium output.
(b) Derive and discuss the Keynesian multiplier for G. How does the relation between investment and output affect the value of the multiplier?
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