Effectiveness of fiscal policy in the IS-LM model скачать в хорошем качестве

Effectiveness of fiscal policy in the IS-LM model

How effective an expansionary fiscal policy is in the IS-LM model to increase the level of output and income will depend on what happens to investment spending during this process. If investment spending is very sensitive to the interest rate -- in other words a small rise in the interest rate will cause relative large decrease in investment spending then fiscal policy is less effective since the increase in government spending causes an increase in the interest rate which decreases investment spending. Government spending is now crowding out investment spending. The less sensitive investment spending is for a change in income and output the less is the increase in investment spending for a given change in income and output. While government spending increases the level of output and income it does not bring about a significant increase in investment spending. Fiscal policy is therefore less effective in increasing the level of output and income the greater the interest sensitivity of investment spending and the less sensitive investment spending is for a change in income.