Question: QUESTION 2 [20 marks]. Using the IS-LM model, answer the following questions about policy implications of expectations affecting consumption and investment decisions: a. In what

QUESTION 2 [20 marks].

Using the IS-LM model, answer the following questions about policy implications of expectations affecting consumption and investment decisions:

a. In what circumstances does an increase in current and planned government spending cause a reduction in current output?

b. What policy should the central bank implement if they want to stimulate current investment, taking into account the effect of expectations on investor confidence?

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