1. Use an IS-LM diagram to show the effects of a decrease in government spending and simultaneously a reduction in the interest rate by the Central Bank. Will output increase, decrease or uncertain? Why? Can you tell what happens to investments? Why?

2 . For a closed economy, the goods market equilibrium condition can be expressed as: Y = C + I + G or I = S + (T - G) where Y is output, C is c onsumption, I is investment, G is government spending, S is saving, and T is tax. Use the equilibrium condition of Y = C + I + G to derive the equilibrium condition of I = S + (T - G)