It is said that both fiscal and monetary policies are intended to solve problems of unemployment and inflation that arise due to economic instability.

(a) Using a well-labeled graphical illustration, determine why a combination of $2 billion decline in government spending with a $4 billion increase in taxes would help to solve demand-pull inflation by eliminating the excess GDP of $20 billion in an economy whose MPC is 0.75.

(b) Use a graphical illustration to explain the supply-side effects of expansionary fiscal policy on inflation and unemployment in Malawis agro-based economy.

(c) What is the basic determinant of the transactions demand for money and asset demand for money, respectively?

(d) Suppose nominal GDP increases from $300 billion to $450 billion and the money velocity is 3. What would be the amount of transactions demand for money?

(e) What are the three main tools of monetary policy?

(f) Identify the two key strengths of monetary policy over the fiscal policy?