Consider the situation faced by the US (and other advanced economies) during the 2008-10 global financial crisis. There was a large negative demand shock and policy rates fell to zero. The central bank and the government are considering how to respond to the crisis and stimulate demand.

a)Would conventional monetary policy help stimulate demand in this situation? Explain and illustrate your answer using the IS-LM diagram. (8 marks)

b)Can fiscal policy help stimulate demand in this situation? Explain and illustrate your answer using the IS-LM diagram. (8 marks)

c)How did the US government actually respond to the crisis? Was the response effective? Explain. (4 marks)