What Determine the Slope of IS Curve

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What Determine the Slope of IS Curve?

• The marginal propensity to save (s ?S/?Y) the
  smaller the s, the flatter the IS curve, vice
  versa.

• The interest elasticity of investment (b ?I/
  ?r) the larger the b, the flatter the IS curve,
  vice versa.

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What Determine the Slope of LM Curve?

• The income elasticity of demand for money (d
  ?Mt/?Y) the smaller the d, the flatter the LM
  curve, vice versa.

• The interest elasticity of demand for money (e
  ?Ma/?Y) the larger the e, the flatter the LM
  curve, vice versa.

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Effectiveness of Monetary Policy

• The effects of monetary policy depends on the
  slopes of IS-LM curves.
• Assuming normal shape of IS curve, the flatter
  (steeper) the LM curve, the weaker (stronger) the
  effects of monetary policy on income.
• Note effectiveness of both monetary and fiscal
  policies is measured in term of changing income

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Effectiveness of Monetary Policy (Cont)

• Assuming normal shape of LM curve, the flatter
  (steeper) the IS curve, the stronger (weaker) the
  effects of monetary policy on income.

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Effectiveness of Fiscal Policy

• Assuming normal shape of LM curve, the flatter
  (steeper) the IS curve, the weaker (stronger) the
  effects of fiscal policy on income.
• Note effectiveness of both monetary and fiscal
  policies is measured in term of changing income

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Effectiveness of Fiscal Policy (Cont)

• Assuming normal shape of IS curve, the flatter
  (steeper) the LM curve, the stronger (weaker) the
  effects of fiscal policy on income.

• Especially, under liquidity trap (central bank
  loses ability to reduce r), the LM curve is
  horizontal, there is not crowding-out effect. The
  reverse is vertical LM curve, there is complete
  crowding-out effect

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Summary of the Effectiveness of Monetary and
Fiscal Policy
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Mixed Monetary and Fiscal Policy

• Expansionary fiscal policy mixes with
  expansionary monetary policy can eliminate
  crowding-out effect.

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Mixed Monetary and Fiscal Policy (Cont)

• However, expansionary fiscal policy mixes with
  contractionary monetary policy can stimulate
  complete crowding-out effect.

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