Answer Happy

a)Explain why the goods market equilibrium gives rise to a
negative relationship between the real interest rate and real
output. Explain why the money market equilibrium gives rise to a
positive relationship between the real interest rate and real
output. Use diagrams to illustrate your answer.
b)Using diagrams to illustrate your answer, explain how monetary
policy can be used to stabilise the equilibrium of real income in
the IS-LM model when: (i) there is real shock to the economy; (ii)
there is a monetary shock to the economy
(c) [8 marks] Due to the “credit crunch” of the 2008-2010
financial crisis many economies have experienced periods in which
the nominal interest rate was almost zero. Using a diagram to
illustrate your answer explain how such a situation can be
interpreted using the IS-LM model. Comment on the effectiveness of
monetary and fiscal policy in such a case. Would your answer be
different if the central bank had used a Taylor Rule in conducting
monetary policy? Explain.