To first be able to concludewhether this policy would work, it is important to take into account thefactors which led to the change in interest rate. There might be reasons coming from the demandside of the economy, and therefore the IS curve would shift. Therefore, any changes in consumption (C),investment (I), government spending (G) or net exports (X), will lead to ashift in the IS curve. Any positivechanges will lead to an outward shift of the IS curve. However, any negativechanges will result into an inward shift of the IS curve.
There may be reasons from the monetary sectorand thus in this case, the LM curve would shift. The LM curve would only shift if there areany changes in the money demand or money supply. As depicted by diagram 2.1, this policy doesnot work when it is the LM curve that has shifted. Therefore, in such a case, the shift in theIS curve in the effort to reduce ‘I’ makes it worse. On the other hand, this policy is expected towork when the IS curve has shifted (in such a case IS curve is shifted back, whichis depicted by diagram 2.
2).
