Alex L.

### Problem 9

Suppose government spending increases. Would the effect on aggregate demand be larger if the Federal
Reserve held the money supply constant in response or if the Fed were committed to maintaining a fixed
interest rate? Explain.

Alex L.

### Problem 10

In which of the following circumstances is expansionary fiscal policy more likely to lead to a short-run
increase in investment? Explain.
a. When the investment accelerator is large or when it is small?
b. When the interest sensitivity of investment is large or when it is small?

Alex L.
\begin{aligned} Y &=C+I+G \\ C &=100+0.75(Y-T) \\ I &=500-50 r \\ G &=125 \\ T &=100 \end{aligned}
where $Y$ is GDP, $C$ is consumption, $I$ is investment, $G$ is government purchases, $T$ is taxes, and $r$ is the interest rate. If the economy were at full