1. Suppose that the economy can be described by a closed-economy IS-LM frameworkand that is in a recession. If you were to advise the policymakers on which actionto take, what would be your advice? Explain and show graphically how monetaryand fiscal policies can be used in this case.2. Consider an economy that is characterised by the following set of equations:C = c0 + c1YDYD = Y − TI = b0 + b1YGovernment 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?
