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    Using the IS-LM model, describe the effects of monetary and fiscal policy on the level of economic activity. Outline the conditions under which these policies are (a) more effective, (b) less effective in changing the national income

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    Solution Preview

    Please refer to the attachment.

    In order study the Monetary and Fiscal Policy by the IS-LM Model, we will start with the basic model and the shifts with IS-LM curves.

    Note: all these changes to the IS LM curves are effected by changing the national income level Y and the interest rate i.

    Now, the central bank adopts expansionary monetary policy by increasing Money supply, there will be a shift in the LM Curve from a Rise in Ms:

    Ms↑: i↓in panel (b) and (a), then LM shifts to the ...

    Solution Summary

    The effects of monetary and fiscal policy on the level of economic activity are shown.