Suppose a closed economy is in recession and the economy is initially in a short-run equilibrium at a level of output below the natural rate.

a)If no policy action is taken, use the IS-LM model to graphically illustrate how the economy will adjust in the long-run.

b) If a fiscal policy is used to return the economy to the natural rate of output, use the IS-LM model to graphically illustrate the long-run equilibrium. What fiscal policy can be used?

c)Explain how investment, the interest rate, and the price level differ in the new long-run equilibrium in the two cases above (a and b).