(Answered) The following questions deal with thenbspis-lmnbspmodel of

Management Studies

The following questions deal with the IS-LM model of a closed economy:

(a) Define the IS curve and the LM curve. In a diagram, illustrate the equilibrium implied by the IS - LM model.

(b) Assume that the government collects only lump-sum taxes. Using a diagram to illustrate your answer, explain the effects of an expansionary fiscal policy in the IS-LM model.

(c) Define the concept of "crowding out" and discuss how the effectiveness of an expansionary fiscal policy depends on the slope of the IS curve, ceteris paribus.

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