Fiscal policy versus monetary policy in the IS-LM model
Channel: Werner Lost
Date: 2010-07-09

Comparing fiscal policy with monetary policy in the IS-LM model.

While an expansionary monetary policy and an expansionary fiscal policy both increase the level of output and income, the impact on the variables, however, is different.

In an expansionary monetary policy, the interest rate is lower, while in an expansionary fiscal policy it is higher. The reason for this is that in an expansionary monetary policy, there is an increase in the nominal money supply which reduces the interest rate. In an expansionary fiscal policy, the money supply remains unchanged, and the increase in the demand for money caused by the rise in the level of output and income, increases the interest rate.