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QUESTION
Suppose the government increases its expenditures with no change in taxes. Use the Keynesian cross diagram (the ZZ-Y diagram) to illustrate graphically and explain verbally what happens to equilibrium
- Suppose the government increases its expenditures with no change in taxes. Use the Keynesian cross diagram (the ZZ-Y diagram) to illustrate graphically and explain verbally what happens to equilibrium output in the goods market.
- Now use the ISLM model to illustrate graphically and explain verbally what happens to equilibrium income, the interest rate, and investment. Clearly explain the effects on investment.
- What would happen to equilibrium output if the increase in government expenditures was matched by an equal increase in taxes (like under a balanced budget rule)? No need to draw any graph for this part; just explain verbally.
