1.
Assume that the policymakers in a closed economy want to increase output without changing interest rates. What kind of policy mix would you recommend and how would your policy mix affect the components of GDP? Explain your answer and the adjustment processes that take place with the help of an IS-LM diagram. [6 marks]
2.
(a) Explain what is meant by income elasticity of money demand and interest elasticity of money demand.
(b) ‘The effect of an expansionary fiscal policy on the output level in a closed economy is very large when income elasticity of money demand is relatively high and interest elasticity of money demand is relatively low’. Do you agree or disagree with this statement? Why? Use appropriate diagram(s) to explain your answer. [2 + 6 = 8 marks]
3.
Explain why an increase in government spending has a larger effect under a fixed exchange rate system and perfect capital mobility than in a closed economy model. Use appropriate diagram(s) to explain your answer. [6 marks]
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