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1 The Economy is at full employment Now the government want to cha

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1. The Economy is at full employment. Now the
government want to change the composition of demand
towards investment and away from consumption, without,
however, allowing aggregate demand to go beyond on full
employment. What is the required policy mix? Use an IS-
LM diagram to show your policy proposal.
Solution
Aggregate Demand = Consumption + Investment + Govt
Spending + Net Exports
In order to reduce consumption and to increase investment
without disturbing aggregate demand, a government may
use different fiscal policies. It can increase income to
which personal disposable income would be lesser
contributing lesser consumption and the same increased
tax revenue could be used in govt. spending as
investment. Another policies may include incrreasing rate
of return on investments, selling public certificates etc. to
which consumption would be reduced and investment could
be increased.

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1. The Economy is at full employment. Now the government want to change the composition of demand towards investment and away from consumption, without, however, allowing aggregate demand to go beyond on full employment. What is the required policy mix? Use an ISLM diagram to show your policy proposal. Solution Aggregate Demand = Consumption + Investment + Govt Spending + Net Exports In order to reduce consumption and to increase investment without disturbing aggregate demand, a government may use different fiscal policies. It can increase income to which personal disposable income would be ...
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