Discuss the IS-LM model and explain intuitively what is meant by crowding out effect.

1. (a) Consider the IS-LM model and explain intuitively what is meant by

crowding out effect. Explain the concept with the help of a graph.

(b) Suppose that the economy is in a recession and assume that the IS

is relatively steep while the LM is relatively flat. If you were to advise

the policy makers on which action to take, what would be your advice?

Explain graphically

If you are answering Q1 your answer will be descriptive. The answers with economic interpretations, graphical explanations and (if possible) mathematical demonstration

rewarded more marks compared to the answers which are sketchy and superfluous.


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