Assignment:
Suppose the government increases its expenditures with no change in taxes. Use the Keynesian cross diagram (the ZZ-Y diagram) to illustrate graphically and explain verbally what happens to equilibrium output in the goods market.
Now use the ISLM model to illustrate graphically and explain verbally what happens to equilibrium income, the interest rate, and investment. Clearly explain the effects on investment.
What would happen to equilibrium output if the increase in government expenditures was matched by an equal increase in taxes (like under a balanced budget rule)? No need to draw any graph for this part; just explain verbally.