A.Create a graph reflecting equilibrium in the IS-LM model. Be sure to label curves, axes and equilibrium values.

B.Model the effect of an increase in government spending.

C.Assuming the central bank targets interest rates, how does the increase in government spending affect output and the inflation rate?

D.Suppose, in a world where the central bank targets nominal interest rates, inflation expectations suddenly decrease. How will the central bank respond? How will output be affected? Hint: remember the Fisher equation