Advanced Macro & Growth · intro
What moves on the IS-LM diagram
Fiscal expansion shifts IS right: higher output, higher interest rate, partial crowding outcrowding outWhen government borrowing raises interest rates and squeezes out private investment. of investment.
Start where IS crosses LM.
Government spending jumps, goods-market equilibriumequilibriumThe point where opposing forces balance, quantity supplied equals quantity demanded, so there's no pressure for price to change. shifts right at every rate.
Output rises but so does r: some private investment is crowded out. The multipliermultiplierThe amount total output changes per dollar of initial spending change, powered by respending: 1/(1−MPC) in the simplest case. is realrealAdjusted for inflation, measured in actual purchasing power., but smaller than the Keynesian cross promised.
Examiners ask this as: fiscal stimulus is curve, government spending islm.
Other scenarios on IS-LM