Consider an economy that uses exclusively labor and capital to produce. Suddenly, the government of the economy plans to permanently increase the level of government purchases. Please use words and figures to illustrate your answers. (1) Suppose the economy is a closed one. How does the long-run GDP of the economy change because of the increased government purchases? (2) Will your answer to (1) be changed if the economy is an open one? Explain your answers briefly. (3) Suppose the economy is a closed one. Will the increased government purchases change the equilibrium interest rate?

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