Answer to Question #223718 in Macroeconomics for Chap legened

Question

Differentiate the fiscal and monetary policies.what are the effects of fiscal policy and monetary policy on short run equilibrium of the IS-LM model?

Answer 1

Fiscal policy influences the economy by controlling taxes and government spending. It impacts market of goods.

On the other hand, monetary policy controls the money supply in the economy. Only the country's monetary authority i.e., the central bank can implement monetary policy. It impacts the financial market.

The fiscal policy does not affect the LM curve.

Borrowing is based on assumption of funding increased spending by the government or tax cuts.t

Since the supply of money remains unchanged, the LM curve stays constant.

However, the expansionary fiscal policy shifts the IS curve to the right.