This leads to an increase in aggregate demand, as reflected by a rightward shift of the IS curve. The new IS curve is the yellow dotted line called IS prime. This pushes the economy away from the effective lower bound. The rise in aggregate demand drives up the interest rate.
This rise in interest rates makes it less attractive for firms and households to spend, just as in our previous example in the standard IS-LM model. This crowding-out effect limits the overall effect of the fiscal expansion on output. In the second case, the government instead implements a contractionary fiscal policy.