A an Economy Is Initially a the Natural Level of Output

Essay

a. An economy is initially a the natural level of output. There is an increase in government spending. Use the LS—LM model to illustrate both the short-run and long-run impact of this policy change. Be sure to label:
i. the axes
ii. the curves
iii. the initial equilibrium
iv. the short-run equilibrium
v. the terminal eqilibrium

b. Explain in words the short-run and long-run impact of the change in government spending on output and interest rates.