Consumption and investment become more sensitive to changes in the interest rate. People expect future changes in government expenditures to offset any current changes in taxes or government expenditures. The demand for money becomes more responsive to the level of output.
P Find the IS curve and the Keynesian multiplier.
Find the LM curve, assuming that the price level is 2. Find the aggregate demand curve. Consider again a small economy with full capital mobility. Analyze the effects of the following events on aggregate demand, foreign reserves of the central bank, money balances, prices, and output for a small economy with complete capital mobility. Consider the classical case, and the normal and extreme Keynesian cases.