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Why is fiscal policy more effective in the Keynesian model when interest rates are at 0?...

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Economics

Why is fiscal policy more effective in the Keynesian model wheninterest rates are at 0? Show this graphically with the moneymarket graph.

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4.1 Ratings (675 Votes)
Ans When interest rate is zerothen the money demand function L depends entirely on output Yand not on the interest rate i This means that people arewilling to hold any amount of money at given interest rates Thismakes the LM curvethe xaxis in the region of zerointerest rate Now any shift    See Answer
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