a)
Consider the equation of exchange with a fixed velocity and real GDP that grows at 2
percent per year. Each year the central bank increases the quantity of money by 3
percent.
Required
If the equilibrium real interest rate is 6 percent, what is the equilibrium nominal
interest rate?

(4 marks)

b)
i)
Define the IS curve. Explain the factors that determine the slope or steepness
of IS curve.

(4 marks)

ii)
What is LM curve. Explain the factors that determine the slope of LM curve

c)
Explain how the government can alleviate the problems associated with economic
recession.

(8 marks)

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