N2

Suppose a government moves to increase expenditures to stimulate the economy. Using the long-run model of the economy developed in Chapter 3, graphically illustrate the impact of increasing government purchases. What happens to Public savings? Private savings? National Savings? Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction curves shift; and v. the terminal equilibrium values. Explain what happens and which curve shifts and why. State in words what happens to: i. the real interest rate; ii. national saving; iii. investment; iv. consumption; and v. output.