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a country has experienced a recession during which

a country has experienced a recession during which, in addition to the decline in output and the increase in unemployment, there is a reduction in interest rates. discuss the possible causes behind this receesion, as well as the government policy that can increase output back to its natural level, without, however, resulting in a possible reduction to private investment!
Answer :- The economy of thecountry has experienced a recession during which, in addition to the decline in output and the increase in unemployment, there is a reduction in interest rates. To explain the siyuation and the causes behind it , we will explain two concepts :- 1) IS curve The IS curve shows the relationship between interest rates generated in financial markets and the equilibrium level of income the economy gravitates toward given these rates. The IS curves position is determined by the factors that determine Yad curves position .Anything ,other than a drop in interest rates, that would push Yad to the left (up) will be represented by the IS curve shifting to the right.And anything, other than a rise in interest rates, that would push Yad to the right (down) will be represented by the IS curve shifting to the left. 2) LM curve The LM curve shows the relationship between the equilibrium level of income the economy and interest rates financial markets gravitate toward given this level of real income. Hold factors that affect MD (besides real income) constant.The higher real income is, the higher the demand for money. The higher the demand for money, the higher the equilibrium rate of interest will be.The lower real income is, the lower the demand for money. The lower the demand for money, the lower the equilibrium rate of interest will be.The LM curves position is determined by the factors that determine MD and MS curves positions


 

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