Does fiscal policy affect the LM curve?

Fiscal policy has no direct effect on the LM curve. Increased government spending or a tax cut is assumed to be financed by borrowing. The money supply does not change, so the LM curve does not change. Expansionary fiscal policy shifts the IS curve to the right (figure 3).

Is LM policy effective?

Monetary policy is more effective if the LM curve is steeper. A steeper LM curve means that the demand for money is less interest elastic. The less interest elastic is the demand for money, the larger is the fall in interest rate when the money supply is increased.

Is LM model criticism?

Critics of IS–LM models correctly point out that important parameters such as the marginal propensity to consume (MPC) cannot be postulated. Critics could also argue as to whether saving today and, hence, whether consumption today are functions of the interest rate.

What are some problems with is LM analysis?

The IS-LM model, however, suffers from two serious limitations: (a) It is a comparative-static equilibrium model. It ignores the time-lags which are important in examining the effects of economic policy changes. (b) If has been called the fix-price model.

How does fiscal policy work in the IS / LM model?

This clip shows in simple examples how fiscal and monetary policy works in the IS/LM model. A combination of fiscal and monetary policy — the policy mix — can be used to achieve macroeconomic policy goals. Loading…

How does monetary policy affect the IS-LM curve model?

Rise in personal taxes will lead to the decrease in aggregate demand. Decrease in aggregate demand will help in controlling inflation. This case can also be shown by IS-LM curve model. Through making appropriate changes in monetary policy the Government can influence the level of economic activity.

Which is an alternative measure of expansionary fiscal policy?

Expansionary Fiscal Policy: Reduction in Taxes: An alternative measure of expansionary fiscal policy that may be adopted is the reduction in taxes which through increase in disposable income of the people raises consumption demand of the people.

How does monetary policy affect the level of economic activity?

Through making appropriate changes in monetary policy the Government can influence the level of economic activity. Monetary policy may also be expansionary or contractionary depending on the prevailing economic situation. IS-LM model can be used to show the effect of expansionary and tight monetary policies.