ECON 10/2 Keynesian (Policy Effects in the IS-LM System)

Monetary Policy shifts in the LM curve:
- Increasing money supply shifts the LM curve down and to the right
- A tax cut (rebate checks) will shift the IS curve up and to the right
- Around the same time we got our rebate checks, the FED was increasing the money supply

Interest Sensitivity:
- Keynesian though people were sensitive to interest rates
- Keynesian = Veritcal IS, Horizontal LM
- Classical = Horizontal IS, Vertical LM

Keynesian Thoughts on Fiscal Policy:
- Though fiscal policy was powerful

Policy Effectiveness:
- The relative effectiveness of monetary and fiscal policy depend upon the slopes of the IS and LM functions
- The IS curve is steep when the interest elasticity of investment is low

READ CHAPTERS 5, 6, & 7!!

Current Events:
Big Companies say loans are hard to get:
- FED buying secondary bonds and pumping money into the financial system (banks)
- Gives banks more money to lend, but they're only lending to the US Gov't
- Banks only lending to the gov't canceled out the proposed effect of the rebate checks and allowed the system to get clogged up again
- Because of the way the financial system is operating, if we try to conduct traditional fiscal policy, we're facing a classical type LM curve (Vertical LM curve and fiscal policy isn't going to have any effect (aside from a quick boom and then back to the way we were))
- Banks are trying to avoid any risk, they have enough bad loans on their books
- Horizontal LM curve for monetary policy & Vertical LM curve for fiscal policy