Question
4. (35 marks) Consider a closed Keynesian economy and assume the economy is initially in general equilibrium. (a) (5 marks) If the government raises tax
4. (35 marks) Consider a closed Keynesian economy and assume the economy is initially in general equilibrium. (a) (5 marks) If the government raises tax to finance an increase in government spending, how would desired national saving be affected? Explain briefly and illustrate using a graph. (b) (10 marks) Use the IS-LM-FE model to explain how economy will respond to the expansionary fiscal policy in the short run and in the long run and illustrate using a graph. Now consider a Keynesian small open economy and the domestic price level is fixed initially. (c) (10 marks) In a flexible-exchange-rate system, explain briefly how the economy will respond the fiscal expansion in the short-run and in the long run and illustrate using a graph. (d) (10 marks) In a fixed-exchange-rate system, explain briefly how the economy will respond the fiscal expansion in the short-run and in the long run and illustrate using a graph.
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