Answer Happy

SECTION A Answer ALL FIVE questions in this section (8 marks each). Briefly explain whether each of the following statements is true or false. 1. An increase in government expenditure financed by borrowing (running a larger budget deficit) necessarily leads GDP to rise by more than the increase in gov- ernment expenditure according to the IS-LM model. 2. The Ricardian equivalence proposition implies that a deficit-financed tax cut will have no effect on national saving. 3. In the Solow model it
3. In the Solow model, it is possible that a higher saving rate can reduce consump- tion in both the short run and the long run. 4. Higher transaction costs increase the demand for money according to the Baumol- Tobin model. 5. If the demand for money is perfectly interest elastic then expansionary mone- tary policy will be effective in raising GDP according to the IS-LM model.