Answer: Fiscal policy is an economic policy that affects the level of macroeconomic activity by adjusting fiscal revenues and expenditures in order to achieve a set goal. In general, the single most important indicator of a country's level of macroeconomic activity is its national income. From the perspective of the IS-LM model, the magnitude of the effect of fiscal policy is the degree to which changes in revenue and expenditure (including variable tax rates, purchases and transfer payments, etc.) move the IS curve, thereby affecting changes in national income. Obviously, the magnitude of this effect varies with the slope of the IS curve and the LM.
When the LM curve is unchanged, the larger the absolute value of the slope of the IS curve, that is, the steeper the IS curve, the greater the change in income when the IS curve is moved, that is, the greater the effect of fiscal policyThe smaller the absolute value of the slope of the IS curve, i.e., the flatter the IS curve, the smaller the change in income when moving the IS curve, i.e., the smaller the effect of fiscal policy (best illustrated in a diagram).
The steeper the IS curve, the less sensitive private investment is to interest rate movements;The smaller the crowding out effect, the greater the policy effect;The flatter the IS curve, the more sensitive private investment is to interest rate movements;The greater the crowding out effect, the smaller the policy effect.
When the slope of the IS curve is constant, the effect of fiscal policy varies depending on the slope of the LM curve. The larger the slope of the LM curve, i.e., the steeper the LM curve, the greater the change in income when moving the IS curve, that is, the smaller the effect of fiscal policy;Conversely, the flatter the LM curve, the more effective fiscal policy will be (best illustrated in a diagram).
When the slope of the LM curve is large, it indicates that the interest rate sensitivity of money demand is small, which means that a certain increase in money demand will cause interest rates to rise more, which will have a greater "crowding out effect" on private sector investment, and as a result, the fiscal policy effect will be small. Conversely, when the interest rate sensitivity of money demand is greater (and thus the LM curve is flatter), even if a lot of money is borrowed from private individuals (through public debt) due to increased spending, interest rates will not rise much and thus will not have a large impact on private investment, so that the increase in spending will increase national income more, i.e., the fiscal policy will have a greater effect.
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