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ISLM - (I gets stimulated Y i Case 3 Expansionary Monetary...

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Case 1: Expansionary Fiscal Policy Case 1: Expansionary Fiscal Policy IS IS’ LM Overall Effects i ; Y C I G Mechanism: In the goods market increase in public expenditures (G) stimulates production/income (Y), which stimulates consumption (C) In the money market the increase in production raises money demand and this increases interest rate (i) This feeds back on goods market: as interest rate rises, private investment (I) gets depressed (“crowding out” effect) Y i
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Case 2: Case 2: Contractionary Contractionary Fiscal Policy Fiscal Policy IS IS’ LM Overall Effects i ; Y C I G Mechanism: In the goods market decrease in public expenditures (G) depresses production/income (Y), which depresses consumption (C) In the money market the decrease in production reduces money demand and this decreases interest rate (i) This feeds back on goods market: as interest rate drops, private investment
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