1.  What are the two key links between the goods market and the money market?

2.  Explain why investment spending depends on the rate of interest.
Draw a rough graph of the investment function (see Figure 12.2)

3.  What happens to aggregate expenditures and the equilibrium output when the rate of interest increases.  Illustrate these effects with a graph of the goods market (see Figure 12.3).

4.  Explain the process through which the money market is supposed to adjust to the equilibrium rate of interest (see Figure 12.4).

5.  What happens to the demand for money and the equilibrium rate of interest when income increases?  Illustrate this effect with a graph of the money market (see Figure 12.5).

7.  What does the size of the “crowding-out” effect depend on?

8.  What are the effects of expansionary monetary policy on: (a) the rate of interest;
(b) investment spending; and (c ) the equilibrium output.  Illustrate these effects with graphs
of the money market and the goods market. 

9.  What does the effectiveness of expansionary monetary policy depend on?

10.  What is meant by “accommodating monetary policy”?  Illustrate with a graph of the money            
market (see Figure 12.7).

11.  What is the effect of contractionary (or restrictive) fiscal policy on the equilibrium output?
Illustrate with a graph of the goods market. 

12.  What is the effect of contractionary (or restrictive) monetary policy on the rate of interest,
investment spending, and the equilibrium output.  Illustrate these effects with graphs of the
money market and the goods market. 

13.  What is meant by the “policy mix”?  Study Table 12.1 which summarizes the main effects
of different policy mixes.

14.  What are other determinants of investment spending, according to the authors?
Do you think there are other determinants of investment spending, besides those on this list?

14.  Problems: 1 - 8.