Assume that an economy is experiencing simultaneous equilibrium in both the product market and money market. Furthermore, assume the MPC is currently around a normal level of 0.65 and the sensitivity of real money demand to also around a normal level. Based on this information, answer the following questions:

a) Using the AD-AS model and IS-LM model illustrate the impact of an expansionary fiscal policy. Label the initial points in both diagrams as A and the new points following the policy change as B. (***fully labelled AD-AS Model shown including correct position of points A and B)

c) If the MPC rises to 0.8 and also the sensitivity of real money demand to changes in the income rises well, use the IS-LM model to illustrate the impact of an expansionary fiscal policy. Label the initial point to the fiscal policy as A and the new point following the expansionary policy as B. (***fully labelled AD-AS Model shown including correct position of points A and B)

d) With reference to the diagrams you have prepared in parts a) and c) explain the reasons that underline the differences in policy effectiveness. (***key reasons for differences in policy effectiveness between scenarios a) and c)