1. Show how the IS curve and the LM curve can be shifted to get an increase in output without a change in interest rates. What kind of mix of monetary and fiscal policies is needed to do this? How should we shift the IS and LM curves if we wanted to get a reduction in interest rates while holding output constant.
2. Assume we are at E1 in equilibrium. a fiscal expansion shift the IS to IS2. We reach equilibrium at E’ where r and GDP are both higher. If we want r to stay constant, we can use a monetary expansion policy that shifts out LM to LM2. This takes us to E2, where GDP is higher but r is same as at E1(r*).