Suppose the economy is experiencing high rate of unemployment .Based on the is -lm analysis what ...

Hi Amir

when the economy faces conditions like the present situation - frozen credit markets, reduced investment and consumption apetite, very high unemployment rate, and zero interest rate bound - many of the standard assumptions of classical economics breaks down. In the circumstances, government is the only agent with the ability to pull the economy. Further, since the economy is operating way below its potential output frontier, large pool of labour unemployed, and aggregate demand heavily constrained by lack of purchasing power, an increase in money supply is not going to lead to inflationary pressures. Also, at the zero-bound, since cash and bonds become interchangeable, at the margins, money is just being held as a store of value, and changes in the money supply have no effect.