June 03, 2003
Deep
The problem is (i) the slopes of the curves and (ii) how far they shift. The results determine the effectiveness of monetary and fiscal policies.
A general view of the issue:
Applied to the IS and LM curves:
The slope of the LM curve depends on how large the changes in money demand caused by income changes
How much the LM curves shifts with an increase in the money supply depends on the interest rate eleasticity of money demand.
A similar story for the IS curve:
The shift n the IS curve depnds on the slope of the savings function.
