ABSTRACT
Changes in fiscal policy are represented by shifts in the IS line because an expansionary budget increases the level of GDP at which total savings (private plus government) would equal intended investment. An autonomous positive shock to domestic investment would produce the same rightward shift of IS. In either case GDP must increase sufficiently to increase private savings to offset either lower government savings or increased private investment. The slope of the BP line relative to the slope of the LM line indicates whether international capital market integration is sufficiently close to strengthen fiscal policy with fixed exchange rates. Perfect capital market integration (where BP is horizontal) means that fiscal policy is highly effective with fixed exchange rates, as shown in Figure 18.11.
