A) Explain in words how and why the income sensitivity of the demand for real balances affect the slope of the LM curve. Think of the demand for real balances as L(r,Y)= eY-fr where e and f are positive constants.
B) What are the effects of a large spending multiplayer on the slope of the IS curve? Graphically show and verbally explain.
C) Graphically show the effects of an increase in government spending on output in the IS-LM model. Verbally explain (including a discussion of the movement from the old equilibrium to the new equilibrium; what is true at the disequilibrium?) Assume a closed economy so that Y= C+I+G. Does output increase by the same amount as in the simple Keynesian cross model? Why does it differ?
D) Seperately describe points that are below and above the IS curve.