Suppose we have a closed economy where the government decides to upgrade the country's roads and thereby increases public investment by 8 percent. The investment is paid for through increased borrowing.

6. Show in an IS-LM diagram how this measure affects production and interest in the country. Be sure to describe the process of adjustment to the new equilibrium.

7. Show what happens on the commodity and money markets as a consequence of this decision.

8. Does the total effect on output become greater or less from an expansionary fiscal policy when we take into account that the interest rate changes?