1. Derivation of the expenditures multiplier
2. Explanation of the differences in fiscal policy effectiveness

1. Graphical presentation of the income-expenditures model

1. Start with a simple income-expenditures equation—perhaps from Tuesday’s quiz—and complement the model with the consideration of interest rates and their influence on Investment Spending.
2. Another consideration must be of money markets—the supply and demand for "loanable funds."
• Supply is assumed to be exogenous—set by the central bank. (Is this necessary for the model to work?)
• Transactions demand for money
• Liquidity demand for money
3. Assuming that money markets tend towards equilibrium, we have a new equation with which we can solve for two endogenous variables—Income and Interest Rates.

Y = C + I + G

C = 180 + 0.9Yd

T = 450

G = 450

I = 540 – 20i

M/P = 900

L = 0.5Y – 100i

1. IS
2. LM
3. Combined