Economics: Demand and Supply
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Explain the effects of monetary and fiscal policy on economic activity using both IS/LM and AS/AD models. Also explain the difference between the supply side and demand theories.
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The response address the queries posted in 857 words with references.
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The response address the queries posted in 857 words with references.
//As per instructions, in this part, we will talk about the consequences of 'Monetary and Fiscal Policy on Economic Activity' using both IS/LM. So, we will discuss about effects under the heading of Introduction, for example: //
Introduction: Effects of monetary and fiscal policy on economic activities using IS/LM model:
Monetary and fiscal policies affect economic activities in different ways. IS/LM and AS/AD models can be used to explain the effects of the policies. The monetary policy has been adjusted, which has caused fall in the interest rate. The rise in the level of income has been caused by the fiscal policy. The conduct and interpretation of stabilization policy has been molded powerfully by the each of the entailments of the IS/LM model (Zwick, 2008).
The implications of IS/LM model show that interest rates are snapback to the initial levels after the decrease or increase in the rates in response to expansionary monetary policy and anterior to a complete alteration of commodity prices. The operations of increase or decrease in income are affected by the fiscal policy. The monetary policy changes the rate of interest speedily and output slowly (Zwick, 2008).
The effects of monetary and fiscal policy:
Shift in IS Shift in LM Movement in Output Movement in Interest Rate
Increase in taxes Left None down down
Decrease in taxes Right None up Up
Increase in spending Right None up Up ...
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- MBA (IP), International Center for Internationa Business
- BBA, University of Rajasthan
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