Financing of Government Expenditure and the Efficacy of Is-Lm

Since Hicks’ publication of Mr. Keynes and the “Classics”, the IS-LM framework has remained a very useful tool with the macroeconomists. Keynes’ revolutionary contribution in General Theory brought the role of government to the forefront of the economic thinking. This paper finds that the IS-LM framework has very few shortcomings to deal with alternative methods of financing government expenditure, but with a caveat: there is atleast one oversimplified assumption on which it has been constructed.