1.
(a) Consider the IS-LM model and explain intuitively what is meant by crowding out affect. 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: your answer will be descriptive. The answers with economic interpretations, graphical explanations and (if possible) mathematical demonstrations will be rewarded more marks compared to the answers which are sketchy and superfluous.