Answer to Question #216543 in Macroeconomics for Leegod

Question

Due the current financial crises that is affecting the US, the senate has voted for a fiscal

stimulus to overcome the recessionary effects that have resulted thereof as advised by the policy analyst. Explain via IS-LM model how the desired objective will be achieved.

Answer 1

The IS- LM model describes how the market for economic goods interact with the money market. Through this model, recessionary effects can be overcome by the adoption of fiscal stimulus which is very significant because it will result in an increase in the spending of the government and reduction in government revenues, this is in the attempt to support overall spending and the rate of employment when the economy is slowing down. Through fiscal stimulus, money supply in the economy will be boosted and the market for economic goods will be upheld. The policy will help in the prevention of severe and long lasting damage to the economy when faced with recessions. It also employs the use of tax policy to influence the economic path overtime.