1.Answer all parts (a) - (d) of this question.

(a)[5 marks] What is the IS curve? Is it upward or downward sloping? Why?

(b)[5 marks] What is the LM curve? Is it upward or downward sloping? Why?

(c)[7 marks] Consider an increment in taxes by the government in the IS-LM model. Show the effects of this policy in a graph. Explain your results.

(d)[8 marks] Suppose that the government decreases its expenses, reducing the public expenditure. However, the central bank wants to keep the level of GDP (output) at its original level. In the context of the IS-LM model explain what the central bank should do to achieve its objective and how it will affect the economy. Use graphs to illustrate your answer.