fiscal policy - controlled by the gov't by deciding on spending (G) and taxes (T)
- fiscal expansion - when gov't purchases increase or taxes are cut
- G increases, T decreases >> Y increases >> shifts IS curve right
- fiscal contraction - when gov't purchases cut or taxes increased
- G decreases, T increases >> Y decreases >> shifts IS curve left
- Y decreases >> demand decreases >> production cut >> Md decreased
- leads to lower interest >> increase in investment
monetary policy - controlled by central banks, federal reserve
- monetary expansion - money supply increases
- Fed purchases bonds >> injects money in economy >> money supply curve (vertical line) shifts right
- need lower interest rate so that consumers don't invest
- lower interest rate >> LM curve shifts down >> higher Y
- monetary contraction - money supply decreases
mixed policy - goods/money markets may choose to cooperate or not w/ policies
- 4 possible cases
- may or may not cooperate w/ each other
- 1. expansionary monetary, expansional fiscal >> LM shifts down, IS shifts right
- 2. expansionary monetary, contractionary fiscal >> LM shifts down, IS shifts left
- 3. contractionary monetary, contractionary fiscal >> LM shifts up, IS shifts left
- 4. contractionary monetary, expansionary fiscal >> LM shifts up, IS shifts right
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