| ent"> | | | | by the government through an increase in the level |
| Introduction: | | | | of government expenditure. This will however result |
| Unemployment is one of the major concerns of | | | | to higher levels of interest rates as a monetary policy |
| today’s economies, this paper analysis the LM | | | | measure to avoid inflation caused by the government |
| and IS curve model in determining how | | | | expenditure. |
| unemployment in the economy can be reduced, there | | | | The LM curve and unemployment: |
| are two types of policies that an economy can apply | | | | The LM curve can also depict a policy measure by |
| to fine tune the economy to achieve required growth | | | | which an economy can reduce the level of |
| and employment, this include fiscal policies which | | | | unemployment, an increase in money supply will result |
| include government expenditure which affect the IS | | | | into a downward shift in the LM curve, as a result |
| curve, the other type of policy include the monetary | | | | the economy will be at a higher output level and |
| policies which affect the LM curve. | | | | therefore higher employment levels, the diagram |
| This paper first discusses the impact of an increase in | | | | below shows a the effect of an increase in money |
| government expenditure on the level of employment | | | | supply on the LM curve and the employment level. |
| in the economy, when the government increases | | | | The above diagram shows the effect of increase in |
| expenditure then the level of employment will | | | | the level of money supply, when the monetary policy |
| increase but the outcome will be inflationary. The | | | | makers increase the level of money supply then the |
| next analysis is the effect of an increase in money | | | | LM curve shifts from LM curve 1 to LM curve 2, as a |
| supply by the monetary policy makers which will | | | | result the outpurt level shifts from Y1 to Y2 which |
| result into an increase in employment. Finally it | | | | signifies an increase in the employment level. |
| discusses the application of mix policy measures | | | | However the interest rates are at a lower level and |
| which will be used to ensure that the inflationary | | | | this can be attributed to thye actions by the |
| pressure does not affect the economy and at the | | | | monetary policy makers in order to increase money |
| same time achieve higher employment levels. | | | | supply. |
| From this paper it will be clear that the cost of | | | | The other effect of this is inflation, when an |
| increasing employment levels is inflation, when | | | | economy increase money supply then the negative |
| employment is increased then inflation will increase, | | | | effect of this is inflation in the economy. |
| this is in line with the Phillips curve which depicts the | | | | From the above discussion it is clear that the effect |
| relationship between employment and inflation. | | | | of reducing unemployment is inflation in the economy, |
| However the government should not attempt to | | | | this is in line with the theory by Phillips who depicted |
| increase employment due to inflation but should | | | | the Phillips curve which plots the relationship between |
| attempt to achieve full employment despite the cost. | | | | inflation and unemployment, his curve is depicted |
| The LM and IS curve: | | | | below: |
| When there is equilibrium in the money market then | | | | The Phillips curve depict that as inflation increases |
| the amount of money demanded is equal to the | | | | then the level of employment is high, but when |
| quantity of money supplied, the LM curve joins | | | | inflation is low then the level of unemployment is high. |
| together combinations of interest rates and national | | | | Mixed policy measures: |
| income at which the monetary sector is at equilibrium. | | | | There exist an alternative to the problem of inflation, |
| There are factors that determine the position of the | | | | this can be achieved through mix policy measure, and |
| LM curve. These factors include the change in the | | | | this involves the mixing of both monetary policies and |
| transaction demand for money, change in speculative | | | | at the same time fiscal policies. However there is |
| demand for money and changes in money supply. | | | | need to consider whether the economy is at its full |
| There are factors that affect money supply and | | | | employment level,when the government increases |
| they include changes in open market operations, | | | | expenditure as we earlier discussed then the IS |
| change in prices and changes in the reserve ratio. | | | | curve shifts upwards, then if we shift the LM curve |
| The IS curve joins together combinations of interest | | | | as shown then we will achieve higher employment |
| rates and national income at which the commodity | | | | levels at the same interest rate level, for this reason |
| market is at equilibrium, this is to say that the | | | | there is need to use both policy measure together. |
| equilibrium expenditure equals output.Shifts in the IS | | | | Mixed policy measures are what governments today |
| curve are attributed to changes in government | | | | use to achieve higher growth and low employment |
| expenditure and changes in net exports. | | | | levels without experiencing high inflation level, all |
| From the above discussion the factors that cause a | | | | economies try to achieve full employment which is |
| shift in the LM and IS curve can therefore be used | | | | the situation where all the available resources in the |
| by the government and monetary policy makers to | | | | economy are utilised including natural; resources and |
| improve the state of the economy, those factors | | | | labour employment. |
| that lead to a shift in the LM curve which include | | | | The LM and IS curves cannot clearly show the use |
| money supply, changes in prices and reserve ratios | | | | of mixed policy measure and also this model cannot |
| can be used to fine tune the economy to reduce | | | | show the policy measure that are undertaken when |
| unemployment, also those factors that lead to a shift | | | | there is a demand shock or a boom in the economy. |
| in the IS curve will also help in reducing | | | | Other policy measures that cannot be shown by the |
| unemployment and these factors include government | | | | IS LM curves include policy measures in a recession, in |
| expenditure and exports. | | | | this case the best model to show this is the AD AS |
| The diagram below shows the combination of the IS | | | | model which uses the inflation adjustment curve and |
| and LM curve: | | | | aggregate demand curve to show the effects of |
| Interest rates | | | | different policy measures. |
| The Is curve is a downward sloping curve while the | | | | Conclusion: |
| LM curve is an upward sloping curve, the point at | | | | From the above discussion it is clear that the policies |
| which the two curves intersect gives us the | | | | can be used to reduce unemployment levels in the |
| equilibrium level of income or output and the | | | | economy, the government will increase expenditure |
| equilibrium interest rate that prevails in the economy, | | | | and as a result the level of employment will increase, |
| in our case our equilibrium income level is Ye and | | | | another option is increased money supply which will |
| equilibrium interest rate is given by I. | | | | result into higher employment levels, however |
| The IS curve and unemployment: | | | | according to the Phillips curve the cost of increased |
| An upward shift in the IS curve could solve the | | | | employment is inflation and therefore every |
| problem of unemployment, an upward shift in the IS | | | | economy must be aware of the inflation ally pressure |
| curve can be as a result of an increase in | | | | caused by increased employment in the economy. |
| government expenditure, the following diagram below | | | | The best option however is to use mix policy |
| depicts how this is possible: | | | | measures whereby both monetary and fiscal policies |
| From the above diagram it is clear that an increase in | | | | are used at the same time to deal with inflation. |
| government expenditure that results to an increase in | | | | Through increased expenditure by the government |
| aggregate demand will result into increased income, | | | | the fiscal policy measure to deal with inflation is an |
| the income level signifies the employment level ion | | | | increase in interest rate to avoid distortion of the |
| the economy and in our case it is clear that this | | | | free market, when there is an increase in money |
| results to higher employment level from y1 to y2. | | | | supply there should be increased taxation by the |
| The first diagram shows an increase in government | | | | government and this will help stabilise the economy. |
| expenditure which results into an increase in | | | | However it is clear that the cost of efforts to |
| aggregate demand from aggregate demand 1 to | | | | reduce unemployment is inflation and therefore no |
| aggregate demand 2, as a result the equilibrium level | | | | matter how these policies are used with reference to |
| shifts from y1 to y2, this in turn shifts the equilibrium | | | | the Phillips curve the economy will still experience |
| level of the IS LM model, the IS curve shifts from IS | | | | inflation. |
| curve 1 to IS curve 2. According to Keynes | | | | Mixed policy measures can only be clearly shown by |
| aggregate demand is equal to consumption plus | | | | the AD AS model which uses the inflation adjustment |
| investment plus government. | | | | line which is a horizontal line and the aggregate curve |
| As a result of this the economy is at a higher output | | | | which depict the fiscal policy measures undertaken by |
| level and for this reason there is higher employment | | | | the economy. However it is clear in this paper that |
| level, however from our diagram this position brings | | | | the government has the ability to reduce |
| about an increase in the interest rate level than it | | | | employment through the use of its policy tools at |
| was originally was at, the interest rate level increases | | | | their disposal. |
| from I1 to I2. Therefore employment can be created | | | | |