1. In response to the decline in aggregate income due to the COVID-19 pandemic, Indian central bank has expanded money supply significantly, but the government of India has left its fiscal expenditure unchanged. In the context of IS-LM model, the pandemic had shifted the IS curve to the left, and the central bank's response has rotated the LM curve downward.This is in contrast with the situation in other countries that launched expansionary fiscal as well as monetary policies. In other words, after experiencing a leftward shift in the IS curve due to the pandemic, other countries employed fiscal policies to shift IS curve to the right at the same time that their monetary policies flattened their LM curve. Assume that the pandemic effects and the policy responses are all temporary. In the following questions, please compare the macroeconomic outcomes of India's current policies with the hypothetical situation where, like other countries, India had used an expansionary fiscal policy in addition to the monetary policy that it adopted.

(a)How would the interest rate and aggregate income in India have been different from the current outcome if India had added expansionary fiscal policy to its pandemic response? [4]

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(b)How would the rupee exchange rate and net exports in India have been different from the current outcome if India had added expansionary fiscal policy to its pandemic response? [6]

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(c)How would investment and household consumption in India have been different from the current outcome if India had added expansionary fiscal policy to its pandemic response? [4]

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