1. Assuming that the central bank follows a simple interest rate target rule, write an essay on the determination of the money supply that would maintain equilibrium in the money and bond markets. Discuss how the central bank can ensure this money supply if the money demand function is unstable and unpredictable.
2. Can monetary and ?scal policies be independent of each other? If not, why is their independence postulated in the IS-LM and IS-IRT analyses? Discuss.The "crowding out" hypothesis is the statement that ?scal de?cits reduce investment; in the limit, full crowding out means a reduction in investment equal to the ?scal de?cit. Is crowding out fully or partially valid in the IS-LM and IS-IRT models?
Can complete crowding out occur in the context of (a) a ?nancially advanced economy, (b) a ?nancially under-developed economy?