Question 2 [10 marks]

What is false in the following reasoning?

The IS-LM model is a powerful conceptual framework allowing economists

to do the comparative statics of the economy's short-run equilibrium of

fiscal and monetary policy. Leaving aside polar cases, the IS curve is negatively sloped and the LM curve is positively sloped, so that the IS-LM model predicts that a ceteris paribus increase in government purchases

will always be able to increase the equilibrium income and the equilibrium interest rate as well as to attain full employment in the economy, irrespective of the size of the increase in .