There are two types of policies that an economy can apply to fine tune the economy to achieve required economic growth and employment levels, this include fiscal policies that include government expenditure which affect the IS curve, the other type of policy include the monetary policies which affect the LM curve. These factors include the change in the transaction demand for money, change in speculative demand for money and changes in money supply. There are factors that affect money supply and they include changes in open market operations, change in prices and changes in the reserve ratio.
The IS curve joins together combinations of interest rates and national income at which the commodity market is at equilibrium, this is to say that the equilibrium expenditure equals output. Shifts in the IS curve are attributed to changes in government expenditure and changes in net exports.
From the above discussion the factors that cause a shift in the LM and IS curve can therefore be used by the government and monetary policy makers to improve the state of the economy, those factors that lead to a shift in the LM curve which include money supply, changes in prices and reserve ratios can be used to fine tune the economy to reduce unemployment, also those factors that lead to a shift in the IS curve will also help in reducing unemployment and these factors include government expenditure and exports.
According to Keynes, aggregate demand is equal to consumption plus investment plus government, this can be stated as Y = C + I + G for a closed economy and Y = C + I + G + (X –M) for an open economy, an increase in government expenditure therefore will increase aggregate demand. ...