1. Using the IS-LM model of a closed economy with fixed price, illustrate graphically and analyse the effect of an increase in government expenditure on the equilibrium interest rate, the level of income, and investment. Suppose that the quantity of money is fixed. Assume standard shapes for the IS and LM curves.
2. Analyse the effect of an expansionary monetary policy (purchase of government bonds) on the equilibrium interest rate an income in a liquidity trap using the IS-LM model (closed economy and fixed prices). Analyse and discuss.
3. Consider the Mundell-Fleming model of a small open economy under floating exchange rate. Draw two diagrams: the first one with the interest rate on the vertical axis and the level of income on the horizontal axis, the second one with the exchange rate on the vertical axis and the level of income on the horizontal axis. In both diagrams analyse the effect of a fiscal expansion on the equilibrium interest rate, the exchange rate, and the level of income. What happen to net exports? Explain briefly.