Question: Use the IS/LM model to analyse a decrease in government purchases. What effect will this policy have on the economy? Use graphs to substantiate your

Use the IS/LM model to analyse a decrease in government purchases. What

effect will this policy have on the economy? Use graphs to substantiate your

explanation.

1. What does the effect depend on? (2 points)

2. Analyse the case, if (6 points each)

i. Money supply is held constant

ii. Interest rate is held constant

iii. short-tun output is constant,

Y t = 0

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