Question

An expansionary fiscal policy will shift which curve in the IS-LM framework? Why that curve?

Answer 1

An expansionary fiscal policy implies that the government will reduce the tax rate or it will increase the government expenditure or the combination of both, so when there is an expansionary fiscal policy it implies that there will be a greater demand of the goods and services in the economy and the aggregate demand will increase, and as the aggregate demand increases in the economy the IS curve will shift to the right and as the IS shift to the right both the interest rate and the output level will increase in the economy. The expansionary fiscal policy will shift the IS curve to the right because the IS curve is associated with goods and services market equilibrium in the economy and expansionary fiscal policy implies that there will be higher demand for the goods and services in the economy.