Question: Consider the dynamic ISLM model proposed in this section, but suppose that (contrary to what we assumed in the text) the interest rate effect is

Consider the dynamic IS–LM model proposed in this section, but suppose that (contrary to what we assumed in the text) the “interest rate effect”

is dominated by the “dividend effect” in determining the slope of the stationary locus for q.

(a) Give a precise characterization of the q˙ = 0 schedule and of the dynamic properties of the system under the new assumption.

(b) Analyze the effects of an anticipated permanent fiscal restriction

(announced at t = 0 and implemented at t = T), and contrast the results with those reported in the text.

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