Assume that a government cuts its expenditure and therefore runs a public-sector surplus. (a) What will this mean for the equilibrium national income? (b) What will this mean for the demand for money and to interest rates? (c) Under what circumstances will it lead to a (i) decrease in money supply, and (ii) no change in money supply? (d) What effect will each of the two scenarios in (c) will have on the rate of interest rate compared with its original level?

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