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Using the IS-LM diagram, show the impact of a contractionary monetary policy for a country when:

(a) it does not affect expectations about future interest rates and output

(b) it affects expectations about future interest rates and output

a) if the policy does not effect expectations about future rates and output, then the shift in the curve is from only the current impacts on rates and output so the curve shifts left.

b) if it does affect expectations about rates and output then the leftward shift in the curve will be from the effects on expectations about future rates and output and current effects on rates and output. So the curve shifts left again.

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