Munich Personal RePEc Archive

A Visual Model of Fiscal Policy

Hiermeyer, Martin (2023): A Visual Model of Fiscal Policy.

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Undergraduate textbooks present the IS-LM model in a way that leaves open three questions. (1) How does the government fund a fiscal stimulus in the IS-LM model? (2) Given the unchanged money supply: What money do economic actors use to buy the extra output that a fiscal stimulus brings? (3) What is the appropriate money measure and interest rate for the IS-LM model? To help with those questions, the paper suggests a visual model of fiscal policy that can be seen as a long-form version of the IS-LM model – a long-form version that still contains answers to the three questions.

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