1. The economy is in a recession. The government increases spending in an effort to move the economy toward full employment (Y*). Money demand is interest sensitive and investment is interest insensitive.
   1. explain each step of the adjustment process,
   2. graph the process (show both “the crowing out” and the path –process– the economy will follow).
   3. How much crowding out would you expect relative to an economy wherein Money demand is interest insensitive and investment is interest sensitive and why.

Answer rating: 100% (QA)

Step 1 Increase in Government Spending The government increases its spending which injects money into the economy This leads to an increase in the mon... View the full answer