1. The economy is at full employment. Now the government wants to change the composition of demand toward investment and away from consumption without, however, allowing aggre- gate demand to go beyond full employment. What is the required policy mix? Use anIS-LMdiagram to show your policy proposal.
2. Suppose the government cuts income taxes. Show in theIS-LMmodel the impact of the tax cut under two assumptions: (a) The government keeps interest rates constant through an accommodating monetary policy. (b) The money stock remains unchanged. Explain the difference in results.
3. Consider two alternative programs for contraction. One is the removal of an investment sub- sidy; the other is a rise in income tax rates. Use theIS-LMmodel and the investment sched- ule, as shown in Figure 11-9, to discuss the impact of these alternative policies on income, interest rates, and investment.