Chapter 8 Explain why the fiscal policy multipliers are sma

) (Chapter 8) Explain why the fiscal policy multipliers are smaller in magnitude in the variable price-fixed wage version of the Keynesian model than in the fixed-price IS-LM model.

Solution

Answer:

the fiscal policy multipliers are smaller in magnitude in the variable price-fixed wage version of the Keynesian model than in the fixed – price IS-LM model because in the variable price-fixed wage version the real and nominal magnitude are distinct while in fixed-price IS-LM model there is no difference between real and nominal magnitude and also IS-LM model takes into account the of the increase in interest rate and suppression of private investments.