Fiscal policy will have a smaller effect in the ISLM model than in a simple income-expenditure model because:

the accelerator does not work in the ISLM model.
the ISLM model introduces lags into the adjustment process.
fiscal policy can crowd out some investment spending.
the marginal propensity to save is unstable in the ISLM model.


In terms of the ISLM model, if people become less thrifty, their actions should move the:

IS curve left.
IS curve right.
LM curve right.
LM curve left.


Back to Reading Overview Next Question