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1.Use the Keynesian cross to show the effect of a decrease in autonomous investment on the economy. Discuss the path of the economy as it adjusts to the new medium-run equilibriun Why does the economy not continue to contract?

2.Use the equation for the 15 curve shown in Section 1.2.3 and Fig. 1.6 to discuss what happens to the is curve in response to the following shocks. In each case provide a real world example of what might cause the shock. (a) An increase in autonomous consumption (i.e. † co). (b) A reduction in the interest sensitivity of investment (i.e. 1a). (c) An increase in the marginal rate of taxation (i.e. 1 t).
Investment function Investment plus autonomous consumption and government spending lo+Co+G Yo Yo= 11-6,19-966+6+6) 1+ C+G y = (CG) 1-6 (1-1) IS 1 Yo Yi Note that: 10 - 20-Q11 and 1, - 20-0172 Figure 1.6 Deriving the IS curve.