Question: Suppose that the government increases public expenditure with no change in taxes.
a. What would be the effects of this policy the decrease in government spending on equilibrium output in the hat goods market? Explain ho and why equilibrium output would be affected Illustrate your answer in the appropriate diagram.
b. Discuss the effects of the decrease in government spending on equilibrium levels of output and interest rate in the economy using the ISLM model. Explain which market (or markets) is (or are) affected and which curve or curves) shifts (or shift Illustrate your answer with the appropriate diagram(s).
c. Given the effects derived in part (b) above, what would be the ultimate effect of the policy on investment? Explain.