IS-LM (Basic)

Expansionary Fiscal Policy The policy shifts the IS curve to the right (IS1). It increases income and increases interest (r1 greater than r0 and y1 greater than y0). The most common expansionary fiscal policy is welfare spending.	Contractionary Fiscal Policy The policy shifts the IS curve to the left. The new equilibrium is both lower income (GDP) and lower interest rate. The most common example of this kind of policy is increasing the tax rate.	Expansionary Monetary Policy In this case the LM curve shifts to the right. The new equilibrium is one of lower interest rate (r1 less than r0) and higher income (Y1 greater than Y0). This is known as "printing money", in layman's terms.	Contractionary Monetary Policy The policy carried out by the monetary authority shifts the LM curve to the left (LM1). The new equilibrium decreases income and increases the interest rate (r1 above r0 and Y1 greater than Y0). Examples of contractionary monetary policy are: buying bonds on the open market, increasing the discount rate or increasing the reserve requirement. It is usually used to fight inflation, at the cost of being recessive.

IS = Equilibrium of the Real Market