Question
In our model, we assumed that net exports could be specified as follows: i = i bar + i2 (r) However, we know that when
In our model, we assumed that net exports could be specified as follows: i = i bar + i2 (r) However, we know that when the economy is expanding, investment tends to increase. Thus, we should include income as one of the determinants in the investment function. Explain how the effectiveness of contractionary monetary policy (d M bar < 0) and Fiscal policy (d g bar< 0) depends on the magnitude of the response of i to changes in y, ( di/dy ) . Make sure to provide your answer with the relevant graphs, mathematical equations, and economic interpretation.
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