Question: Consider the extended IS-LM model analyzed in the course and assume that there is an increase in the risk premium: a) How can the central

Consider the extended IS-LM model analyzed in the course and assume that there is an increase in the risk premium: a) How can the central bank react to offset the effect of the increase in the risk premium on the level of output? Analyze graphically and explain briefly. b) Briefly explain what the zero-bottom constraint is, and why it is possible that this constraint limits the ability of the central bank to constraint may limit the ability of the central bank to fully offset the impact the impact of the rising risk premium on the level of output.

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