A Brief Note on Economic Policy Effectiveness

This study develops a theoretical model for investigating the impacts of households who are target savers and firms that are growth maximizing on the effectiveness of standard monetary and fiscal policies. These two circumstances together generate a dynamic in which the condition for IS-LM stability is mathematically reversed, i.e., the slope of the IS curve must exceed that of the LM curve. Under these conditions, an expansionary fiscal policy raises both the interest rate and the GDP level, as might be expected; however, an expansionary monetary policy leads to a lower GDP level, which is an unexpected outcome.