(1) Use the IS-LM model to show how monetary and fiscal policy work. (2) Describe how the sensitivity of money demand to interest rates and income affects the slope of the LM curve. (3) Detail when in the business cycle the LM curve will be flat or steep. (4) Show how the slope of the LM curve influences the effectiveness of both monetary and fiscal policy. Be sure to include discussions of crowing out and the liquidity trap. (5) Using this model, indicate when it is best to use monetary policy and when it is best to use fiscal policy. From this analysis, which policy should be used to stabilize the economy? Hints: Please include graphs to illustrate your points (labeling all axes and curves, and indicating which way curves are shifting). (1) and (4) should be the longest sections
