What is the effect of expansionary fiscal policy in the IS-LM model?
Expansionary monetary policy moves the LM curve to the right, raising income and lowering interest rates. Contractionary monetary policy moves the LM curve to the left, lowering income and raising interest rates. Expansionary fiscal policy moves the IS curve to the right, raising both income and interest rates.
How monetary and fiscal policies affect the IS and LM curves?
IS-LM model can be used to show the effect of expansionary and tight monetary policies. A change in money supply causes a shift in the LM curve; expansion in money supply shifts it to the right and decrease in money supply shifts it to the left.
What shifts the LM curve to the left?
The LM curve will shift left during panics, raising interest rates and decreasing output, because demand for money increases as economic agents scramble to get liquid in the face of the declining and volatile prices of other assets, particularly financial securities with positive default risk.
What shifts the LM curve to the right?
The LM curve shifts right (left) when the money supply (real money balances) increases (decreases). It also shifts left (right) when money demand increases (decreases).
What causes a change of slope of the LM curve?
When the level of income increases as a result of the fall in the rate of interest, the LM curve is shifted to the right. We can thus conclude that an increase in the supply of real money balances (MIP) leads to the rightward shift of the LM curve.
Why LM curve is downward sloping?
The IS curve is downward sloping because as the interest rate falls, investment increases, thus increasing output. The LM curve describes equilibrium in the market for money.
What factors determine the steepness of the IS and LM curve?
The steepness or flatness of the LM curve depends on interest elasticity of demand for money. If the demand for money is interest inelastic the LM curve will be fairly steep. If it is fairly elastic, the LM curve will be relatively flat. The higher the value of c1, the steeper the LM curve.
What makes the LM curve flatter?
The LM curve is flatter if the interest elasticity of demand for money is high. On the contrary, the LM curve is steep if the interest elasticity demand for money is low. 4. The LM curve shifts to the right when the stock of money supply is increased and it shifts to the left if the stock of money supply is reduced.
What would be an example of expansionary fiscal policy?
What is an example of an expansionary fiscal policy? An example of expansionary fiscal policy could be an increase in welfare spending. However, it is only considered expansionary if the government doesn’t bring in the same amount through taxes. In other words, it’s spending more than it’s bringing in.
What are the main purposes of the expansionary fiscal policy?
– Keynes advocated the use of fiscal policy as a way to stimulate economies during the great depression. – Fiscal Policy was particularly used in the 50s and 60s to stabilise economic cycles. These policies were broadly referred to as ‘Keynesian’ – In the 1970s and 80s governments tended to prefer monetary policy for influencing the economy.
Why does expansionary fiscal policy increase the money supply?
Fiscal policy on its own does not increase the money supply (unless the government just prints money to provide the new spending). However, if the people take their tax cut (or the money they get from the increased government spending) and save it, the money supply can increase. The way that happens is through the multiplier effect.
Why expansionary fiscal policy is named so?
Thank you for your question. Expansionary fiscal policy is so named because it is designed to expand the GDP, or the Gross Domestic Product. The policy tries to “expand” the size of the economy in the specific nation, and it is seen as “expansionary” rather than constrictive.