1. i) Consider an economy that is operating at full employment equilibrium. Graphically illustrate the effect of an increase in government spending (G) on the price level and the level of GDP in the short run.
ii) Explain with the aid of an AD-SAS-LAS diagram, how long run adjustments will take place in this economy as a result of the event in i) above?
2. i) Explain how banks create deposits by making advances.
ii) Describe the factors that limit how much credit and deposits the banks are able to create.