(Answered) A assume that the domestic economy currently has output y1

Management Studies

(a) Assume that the domestic economy currently has output Y1 which is substantially below the natural level of output, Yn, and the interest rate at 0%. Use the IS/LM model to explain the policy measures that can be undertaken by the central bank to increase output.

(b) Explain why it may be necessary to implement fiscal stimulus when the interest rate is at 0% and what is the limitation of expansionary fiscal policy?

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