Suppose that the natural rate of interest has gone down, and that the central bank is con-strained by the zero lower bound, with inflation below the central bank’s target, and a positive output gap. Further, suppose that if government spending goes up permanently, that higher future government spending will increase anticipated future inflation (by a Phillips curve effect in the future).

(a) What will be the multiplier effect of government spending on output, assuming that the nominal interest rate stays at zero?

(b) Explain your results, with the aid of diagrams.