Answer to Question #51417 in Macroeconomics for William Waso Wasonga Omole

Question

The full effect of fiscal policy may not be realized if not matched with changes in monetary policy, explain using the IS/LM model

Answer 1

Fiscal policy and monetary policy are the two tools used by the State to achieve its macroeconomic objectives. While for many countries the main objective of fiscal policy is to increase the aggregate output of the economy, the main objective of the monetary policies is to control the interest and inflation rates. The IS/LM model is one of the models used to depict the effect of policy interactions on aggregate output and interest rates. The fiscal policies have a direct impact on the goods market and the monetary policies have an direct impact on the asset markets; since the two markets are connected to each other via the two macrovariables output and interest rates, the policies interact while influencing output and interest rates.