1. Explain the Keynesian theory of money demand. What motives did Keynes think determined money demand? What are the two reasons why Keynes felt velocity could not be treated as a constant?
2. Use the IS-LM model to answer this question. Suppose there is a simultaneous increase in government spending and increase in the money supply. Explain what effect this particular policy mix will have on output and the interest rate. Based on your analysis, do we know with certainty what effect this policy mix will have on output? Explain using a graph.
3. Increases in the budget deficit are believed to cause reductions in investment (crowding out). Based on your understanding of the IS-LM model, will a tax cut cause a reduction in investment? Explain using a graph.