The effectiveness of fiscal policy to stimulate or slowdown the economy depends on the responsiveness of demand for money to income (Y). Meanwhile, the effectiveness of monetary policy to stimulate or slowdown the economy depends on the responsiveness of investment to the interest rate.
a. Consider an increase in government spending in order to stimulate the economy. Using diagram, demonstrate that the extent to which the increase in government spending can affect the output/income and the interest rate depends on the responsiveness of demand for money to income.
b. Consider an increase in money supply in order to stimulate the economy. Using diagram, demonstrate that the extent to which the increase in the money supply can affect the output/income and the interest rate depends on the responsiveness of investment to the interest rate.