Application of IS-LM in Economic Policy Flashcards
How does IS-LM explain recessionary gaps?
A leftward shift in the IS or LM curve causes reduced output and higher unemployment.
How does IS-LM explain inflationary gaps?
A rightward shift in the IS or LM curve causes excessive demand, leading to inflation.
Why do Keynesians prefer fiscal policy over monetary policy?
They argue fiscal policy has a direct impact on aggregate demand.
Why do monetarists prefer monetary policy?
They believe controlling money supply is the most effective tool for stabilizing the economy.
What happens if fiscal expansion is combined with monetary contraction?
Higher interest rates may neutralize the fiscal policy effects.
How can governments use IS-LM to stabilize business cycles?
By adjusting fiscal and monetary policy to counteract economic fluctuations.
What is the primary policy tradeoff in the IS-LM model?
Balancing output growth with inflation and interest rate stability.
How does IS-LM help policymakers during economic crises?
It helps assess the impact of different policy options.
What are automatic stabilizers in the IS-LM framework?
Mechanisms like taxes and unemployment benefits that adjust with economic conditions.
How does the IS-LM model influence modern macroeconomic policy?
It provides a foundational framework for analyzing short-run economic fluctuations.
