a.An economy is initially at the natural level of output. There is an increase in government spending. Use the IS-LM model to illustrate both the short-run and long-run impact of this policy change.

Be sure to label: i) the axes; ii) the curves; iii) the initial equilibrium,iv) the short-run equilibrium, and v) the terminal equilibrium.

b.Explain in words the short-run and long-run impact of the change in government spending on output and interest rates.