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.