Comparing expansionary fiscal policy with contractionary monetary policy in the IS-LM model
Автор: Bernard
Загружено: 2012-04-03
Просмотров: 13529
In the IS-LM model an expansionary fiscal policy increases the level of output and income while for a contractionary monetary policy the level of income and output decreases .
In both cases the interest rate is higher. The reason for the increase in the interest rate, however, differs. In the case of an expansionary fiscal policy the demand for money increases (since Y increases) while the supply of money is fixed which then leads to an increase in the interest rate. In the case of a contractionary monetary policy the money supply is lower which leads to a higher interest rate.
Investment spending is lower in the case of a contractionary monetary policy since both a higher interest rate and a lower output and income level decrease investment spending. In case of an expansionary fiscal policy the impact on investment spending is uncertain since it decreases because the interest rate is higher and increases since the level of output and income is higher.
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