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Pavitar Parkash Singh, LPU Unit–21: Effect of Fiscal Policies Under Different Cases in IS-LM Framework

Unit–21: Effect of Fiscal Policies Under Different Cases in Notes

IS-LM Framework

Contents
Objectives
Introduction
21.1 Monetary and Fiscal Policy
21.2 Monetary Policy and AD
21.3 Monetary Policy and Shift in the AD Curve
21.4 Fiscal Policy and Shift in the AD Curve
21.5 Summary
21.6 Keywords
21.7 Review Questions
21.8 Further Readings

Objectives

After studying this unit, students will be able to:

y Know the Monetary and Fiscal Policy.
y Know the Monetary Policy and AD.
y Know the Monetary Policy and shift in the AD Curve.

Introduction

We study such situation in which Monetary Authorities, in the form of equipment of monetary policy
determine the rate of interest (instead of money supply). When interest rate is reduced then it is the
indication of expansionary monetary policy and when interest rate is increased then it is the indication
of contractionary monetary policy. We have known from IS-LM Model that the rise in ‘r’ is related
with the reduction in money supply while the reduction in ‘r’ is related with the rise in money supply.
Therefore, when ‘r’ is increased then it indicates the contraction in money supply in economy when
‘r’ is reduced then it indicates the expansion in money supply.

21.1 Monetary and Fiscal Policy

The IS-LM Model can be used in the study of the effect of Monetary and Fiscal Policy. To get economic
stability, we’ll interpret the thing how Monetary and Fiscal Policy affect the level of AD (In the
reference of IS-LM Model).

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