For this question, assume that firms experience an increase in ...

[bb]

For this question, assume that firms experience an increase in sales. We would expect that this increase in sales will cause
 
  A) an increase in profit per unit of capital.
  B) a decrease in profit per unit of capital.
  C) no change in profit per unit of capital.
  D) ambiguous effects on profit per unit of capital.
  E) none of the above

Question 2

Use the IS-LM model to answer this question. Suppose there is a simultaneous increase in government spending and increase in the money supply. Explain what effect this particular policy mix will have on output and the interest rate. Based on your analysis, do we know with certainty what effect this policy mix will have on investment? Explain.
 
  What will be an ideal response?

[allisonblackmore]

Answer to Question 1

A

Answer to Question 2

In this case, the LM curve shifts down and the IS curve shifts to the right. The output will clearly be higher. The effects on interest rate depend on the relative magnitude of the two policies. The effects on I are also ambiguous. If interest rate falls, I will be higher. However, it is possible that interest rate will rise here which creates the ambiguity.

[bb]

Correct answers!

[allisonblackmore]

Great! Please up vote