INTRODUCTION: Keynesian framework IS-LM Model According to Dornbusch (2011), the IS-LM model was

During the years after World War II, the development of the IS-LM model took several directions. Probably, the most prominent ideas on that theory were expressed in the work of John Hicks called "Mr. Keynes and the Classics". The model expressed in the article was largely based on the works of John Maynard Keynes and became a widely accepted as the alternative framework to standard Keynesian analysis. The IS-LM model is a way of modelling equilibrium in the economy by looking at equilibrium in the goods and services markets (the IS curve) and equilibrium in the money markets (LM curve). Where both these markets are in equilibrium will be the equilibrium level of income. The IS-LM model looks at income against

A decrease in tax rates might be enacted to stimulate consumer spending. If households receive the tax cut but expect it to be reversed in the near future, they may hesitate to increase their spending. Believing that tax rates will rise again (and possibly concerned that they will rise to rates higher than before the tax cut), households may instead save their additional after-tax income in anticipation of needing to pay taxes in the future.

Decreasing a lump sum tax will shift the IS curve to the right. Decreasing the lump sum tax will increase consumer income, which will cause aggregate demand to go up.

Monetary development is something that everybody around the globe battles with ordinary. A great many people are unmindful in respect to what 's genuinely happens in the economy as to expansion, unemployment, and loan costs; these things are all directed by a national bank called the Federal Reserve System. The arrangement that I will talk about in this paper chooses if unemployment, hobby, and swelling declines or increment is fiscal strategy. Money related arrangement chooses what value a man pays for a thing at the store, the amount of premium a man will get charged on an advance for an auto. These are all things that no one genuinely asks themselves, a great many people simply search around and pick the best value or the best financing

The primary tactics utilized by the stimulus plan relied heavily on expansionary fiscal policy through the use of increased government expenditures as seen in Table 2 ("The Impact of the Recovery Act on Economic Growth"). Tax cuts were also instituted to stimulate economic growth (“Why Did Obama Extend the Bush Tax Cuts in 2010?,” n.d.). According to Keynesian economists, increased government spending would increase consumer confidence and spending which would provide for a reduction in unemployment rates through increases in job creation (John Maynard Keynes). Additionally, increases to disposable income would be seen through the use of targeted tax cuts and would ultimately result in an increase in consumption (Arnold, 2001). This can be seen in Chart 1 as an increase in disposable income that occurs concurrently with a rise in consumer spending.

9. When the Fed raised the interest rates between 2004 and 2007, the Federal Reserve

IS-LM model can be used to show the effect of expansionary and tight monetary policies. A change in money supply causes a shift in the LM curve; expansion in money supply shifts it to the right and decrease in money supply shifts it to the

4.|In the Keynesian-cross model, both the price level and interest rate are held constant. A decrease in government spending reduces output by 1/(1 – MPC) times the change in government spending. In the IS-LM model, the reduction in output caused by the decrease in government spending is partially offset by an increase in investment (crowding in). In the IS-LM model, the decrease in government spending reduces income as in the Keynesian-cross model, but the reduction in income also reduces the demand for money, which in turn reduces the interest rate for a given money supply. The lower interest rate stimulates the off setting investment spending.|

Changes in Income Taxes is a tax levied by a government directly on income, especially an annual tax on personal income. Income taxes effects the consumption component of the aggregate demand. An increase in taxes will reduce personal income and reduce thereby reducing consumption or spending power. By reducing personal taxes, this would help the middle class save more for future use and spend more, which in turn will continue to help stimulate the

In the book it explains to us that the interest rate is negatively related to the bond price. In other words, when the equilibrium bond price rises, the equilibrium interest rate falls and vise-versa. There are other factors which led to the down fall of interest rates in the Japanese market. For example, the lack of profitable investments opportunities in Japan, and the business cycle contraction and the decrease of wealth during the business cycle contractions. These all would lead to the increase in bond price and the decrease of interest rates. This application shows us that low interest rates are not a good thing. In Japan’s case, the low and negative interest rates were a sign that their economy was in trouble with falling prices and a contracting economy. The interest will only rise back to normal levels when their economy returns back to a better economy.

1441-1442) mention that, in this model, shocks due to innovation and/or expectations can generate credit cycles and asset price fluctuations. Furthermore, they highlights three worth considering properties of this model related with the recent credit boom. First, loose monetary policy may not fully explain credit booms and asset bubbles because a decline in interest rate increase the money demand and the price of assets but the result on credit demand is ambiguous. The unclear effect on credit demand occurs because the positive effect of declining interest rate and the negative effect of lower cost of equity. Second, demand for credit and asset prices increase if expectation for higher future asset prices exist. In that case, the result in money demand is not certain. The higher asset prices influence positively money demand but the expected return of real assets negatively. Ultimately, the expansion of credit, due to for example financial innovations, to lead to lower interest rates and higher money demand and asset

Two economic models of thought are classical and Keynesian models. Each model takes a diverse approach to the economic education of financial policy, buyer behavior, and government spending. The classical model, which traces its origins to the 1770s, was the first systematic attempt to explain the determinants of the price level and the national levels of real GDP, employment, consumption, savings, and investments. Classical economist Adam Smith and others assumed that all wages and prices were flexible and that competitive markets existed throughout the economy. Classical economic theory is fixed in the theory of an (no government) unrestrictive economic market. This model especially its focus toward macroeconomics relies on four major assumptions: pure competition exists, wages and prices are flexible, people are motivated by self-interest, and people cannot be fooled by money illusion.

This example of short run and long run aggregate supply and demand brings us straight into IS-LM Model. The IS-LM Model shows the combinations of both income and interest rates and shows how equilibrium is reached in both the goods and money markets. This model involves two schedules/curves, the IS curve and LM curve. The IS schedule shows the different combinations of income and interest rates at which the goods market is in equilibrium and the LM schedule displays the combinations of interest rates and income compatible with equilibrium in the money market. IS-LM schedule in equilibrium or the goods and money markets in equilibrium.

With an interest rate of nearly 0%, it was the same for people to hold money or to buy bonds. In other words, there was no place for the Federal Reserve to use conventional expansionary monetary policy to decrease the interest rate. Normally, once the Federal Reserve increases the money supply through open market operations, the LM curve will shift to the right, leading to a lower interest rate and a higher GDP. Unfortunately, as shown in Figure 2, the confidence of both consumers and the private sector decreased because of the collapse of the housing bubble, which led to a significant decrease in aggregate demand and a shift in the IS curve to the left. As a result, the interest rate became zero during the financial crisis. Thus, no matter how far the LM curve shifts to the right, the interest rate will remain constant at

| Critics of spending hikes argue that tax cuts can expand both aggregate demand and aggregate supply and that hasty increases in government spending may lead to wasteful public projects.Tax cuts increase aggregate demand by increasing household’s disposable income, as