Keynesian System3 - monetary policy (fiscal policy) actions...

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Keynesian System Policy Effects in the IS-LM System
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Monetary Policy Shifts in the LM Curve Interest Rate Income IS LM(M 0 ) LM(M 1 ) M 1 >M 0 r 0 r 1 Y 0 Y 1
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Fiscal Policy Effect of an Increase in Government Purchases Interest Rate Income IS(G 0 ) LM IS(G 1 ) r 0 r 1 Y 0 Y 1
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Fiscal Policy Effect of an Increase in Taxes Interest Rate Income IS(T 0 ) LM IS(T 1 ) r 0 r 1 T1>T 0 Y 1 Y 0
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Monetary-Fiscal Policy Combination Interest Rate Income IS(T 0 ) LM(M 0 ) LM(M 1 ) r 0 Y 0 Y 1 M 1 >M 0 T 1 <T 0 IS(T 1 )
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Policy Effectiveness The relative effectiveness of monetary and fiscal policy depend upon the slopes of the IS and LM functions Generally, a steep (flat) IS function favors fiscal policy (monetary policy) actions Generally, a steep (flat) LM function favors
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Unformatted text preview: monetary policy (fiscal policy) actions Policy Effectiveness: The Elasticity of Money Demand and Investment The IS curve is steep when interest elasticity of investment is low. Therefore, fiscal policy is more effective when interest rates are not an important factor in investment decisions. The LM curve is steep when interest elasticity of money demand is low. Therefore, monetary policy is more effective when speculative demand is not an important reason for holding money....
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This note was uploaded on 05/03/2009 for the course ECON 332 taught by Professor Drabicki during the Spring '08 term at University of Arizona- Tucson.

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Keynesian System3 - monetary policy (fiscal policy) actions...

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