question 1

Question 1 Assume the economy starts at an equilibrium (Y i"). Suggest a policy mix to achieve the following objectives: a) Increase Y while keeping i constant (Plot the IS-LM curves. Show the effects of your proposed policy mix in the IS-LM diagram, and explain) What happens to each component of aggregate output, i.e., C, I and G.? (5 marks) b) Decrease the fiscal deficit while keeping Y constant (Plot the IS-LM curves. Show the effects of your proposed policy mix in the IS-LM diagram, and explain). What happens to each component of aggregate output, Le., C. I and G.2 (5 marks) c) Would you recommend such a policy mix to the Malaysian economy? Will people want to hold bonds or money if the interest rate on bonds is negative? Think about the limits of monetary policy. (8 marks) [Total : 18 marks]