Analyzing China s Fiscal Policy with the IS LM Model 10

The effect of fiscal policy and monetary policy refers to the increase or decrease in equilibrium output caused by certain fiscal and monetary expansion or contraction policies. The greater the increase or decrease, the stronger its effect; Otherwise, its effectiveness is weak.

1. General linear IS-LM model.

For the given normal LM curve, the flatter the IS curve, the stronger the fiscal policy effect; Conversely, the weaker. For the given normal IS curve, the flatter the LM curve, the stronger the fiscal policy effect. Conversely, the weaker. For the given normal LM curve, the flatter the IS curve, the stronger the monetary policy effect; Conversely, the weaker.

For the given normal IS curve, the flatter the LM curve, the weaker the monetary policy effect; On the contrary, the stronger.

2. Extreme Keynesianism.

One is the infinite elasticity of interest rates for investment demand (Keynesian trap). The LM curve is horizontal, which means that when interest rates are lowered to a very low level, people's demand for money is infinite. Fiscal policy works best because the crowding out effect is zero. Monetary policy is ineffective.

Second, the interest rate elasticity of investment demand is zero or very small. The IS curve is vertical or close to vertical, which means that private investment is very insensitive to changes in interest rates, that is, private investors' investments have little to do with changes in interest rates.

3. Classicism.

The interest rate elasticity of money demand is zero, and the classical case refers to a situation where the IS curve is horizontal and the LM curve is vertical, where monetary policy is effective and fiscal policy is ineffective. The interest rate coefficient of investment demand is very large, that is, how much the increase in spending is how much private investment spending is squeezed out, so fiscal policy is ineffective. And there is no speculative demand for money, and monetary policy is completely effective.

4. General nonlinear IS-LM model.

In general, the IS curve becomes more and more flat as income increases, and the slope of the LM curve rises as income increases. Cause.

Therefore, in the period of economic depression with low income levels, the effect of fiscal policy is better, but the effect of monetary policy is less; In the boom period when the income level is higher, the effect of monetary policy is better, while the effect of fiscal policy is less. Under normal circumstances, both fiscal policy and monetary policy have a certain effect in promoting economic stability, and adjustments can be made accordingly according to the actual economic situation.

When the LM curve is unchanged, the larger the absolute value of the slope of the IS curve, that is, the steeper the IS curve, the greater the change in income when the IS curve is moved, that is, the more obvious the effect of fiscal policy. Conversely, the flatter the IS curve, the smaller the change in income when the IS curve moves, that is, the smaller the effect of fiscal policy.

Expansionary fiscal policy shifts the IS curve to the right, increasing interest rates and national income, and interest rates** are not conducive to the increase of private investment and have a crowding out effect.

But when contractionary monetary policy is pursued at the same time, the LM curve shifts to the left, income Y decreases, and interest rates rise.

The end result of both is that incomes remain unchanged while interest rates rise, adversely affecting the economy.

1. The flatter the LM curve, the more obvious the effect of fiscal policy, the income growth, and the small crowding out effect.

2. The flatter the IS curve, the less obvious the effect of fiscal policy will be, and the income growth will have a greater crowding out effect.

3. When the vertical IS curve intersects the horizontal LM curve (the Keynesian region of LM), fiscal policy is fully effective.

4. The sloping IS curve intersects with the horizontal LM curved width Sun Line (the Keynesian region of LM), and the fiscal policy is still very effective. There is no crowding out effect.

5. When the horizontal IS curve intersects with the vertical LM curve (the classical region of LM), the fiscal policy is completely ineffective, and the policy is completely effective.

The IS-LM model is an important tool in macroeconomic analysis and is a theoretical structure that describes the interconnections between product markets and currency markets.

In the product market, national income is determined by the aggregate expenditure or aggregate demand level of consumption c, investment i, ** expenditure g and net exports x-m, and aggregate demand, especially investment demand, is affected by interest rate r, which is determined by supply and demand in the money market, that is, the money market affects the product market;

On the other hand, the national income determined by the product market will affect the demand for money, and thus the interest rate, which is the impact of the product market on the money market.

Active fiscal policy has shifted the IS curve to the upper right. This will increase both the equilibrium interest rate and the national income. This is because when the expenditure increases, the national income increases, and the increase in the national income increases the demand for money in circulation, which increases the interest rate.

Rising interest rates crowd out private investment. Therefore, at the same time, it is supplemented by a loose monetary policy to increase the amount of money in circulation, so that interest rates will fall, and the decline in interest rates will increase investment, and national income will increase through the multiplier effect. This is reflected in the IS-LM model, where the LM curve moves to the lower left at the same time.

Because the magnitude of the LM curve movement is unknown, interest rates may rise or fall, but national income must increase.

Macroeconomic policy refers to the state or the conscious and planned use of certain policy tools to regulate and control the operation of the macroeconomy in order to achieve certain policy objectives. The fundamental transformation of the macroeconomic policy system has not yet been fully realized, and the influence of the planned economy is still strong, and this cannot but be said to be the key reason why the current macroeconomic policies, including the fiscal policy, have failed to achieve the expected results.

In the Keynesian region, IS change has the greatest impact on national income, while LM change has no effect on national income, so fiscal policy is effective and monetary policy is ineffective.

In the classical region, the IS change only affects the interest rate and does not affect the equilibrium national income, while the LM change has the greatest impact on the national income, so the monetary policy is effective and the fiscal policy is ineffective. In the intermediate region, both fiscal and monetary policies affect the equilibrium national income and interest rates, and both fiscal and monetary policies are effective.

The IS-LM model is an economic analysis model generalized by John Richard Hicks, a famous modern British economist and Alvin Hansen, the founder of the Keynesian school in the United States, on the basis of Keynesian macroeconomic theory, that is, the Hicks-Hansen model, also known as the Hicks-Hansen synthesis or Hicks-Hansen graph.

IS-LM is mainly to solve the current economic problems through economic policy, the effect of fiscal policy is relatively fast, and the monetary policy has a lag, which you have to explain in detail in Gao Hongye's Western economics.

The IS-LM model can help us understand the effects of fiscal policy and monetary policy, which are expansionary and bring about patent rates.

decline, increase in income; Expansionary fiscal policy and contractionary monetary policy have brought about a decline in interest rates and a decrease in income. Contractionary fiscal policy and expansionary monetary policy have led to a decline in interest rates and an increase in income. Contractionary fiscal and monetary policies have led to higher interest rates and lower incomes.

An increase in income means an increase in employment, an increase in inflation. A decrease in income means a decrease in employment, a decrease in inflation.

Therefore, the choice of macroeconomic policy is inevitably related to the choice of the target, depending on whether the target is committed to the treatment of unemployment or the treatment of inflation.