3 Ba XnipiE Suppose the demand for real money balances (%) depends on disposable income (Y T) as well as the interest rate (r). That is, the money demand function is: % = L (r, Y - T). Using the IS-LM model, illustrate how this change in the money demand function impacts the analysis of expansionary scal policy. a. Analyze the impact of government purchases. First, alter the IS-LM graph below to reect the impact of an increase in government purchases. Next, move the equilibrium point to indicate the new equilibrium. Analyzing Government Purchases Interact Rate, r (in %) 0 2 4 6 8 10 12 14 16 18 20 Income, Y (in trillions of S) b. If money demand is a function of disposable income rather than national income, this does not alter the analysis of an increase in government purchases. 0 False 0 True c. In this analysis, an increase in government purchases will always increase national income (Y). (I. Analysis of the inuence oftax policy. First, alter the ISLM graph below to reect the impact of a decrease in taxes (T). Next, move the equilibrium point to indicate the new equilibrium. Analyzing Tax Cuts Interest rate, r (in %) O'I 0 2 4 6 8 10 'l 2 1 4 16 'l 8 20 Income, Y (in trillions of $) e. If money demand is a function of disposable income rather than national income, this does not alter the analysis of a tax cut. 0 False 0 True f. In this analysis, a decrease in taxes will always increase national income (Y)