Explain why Keynesianism emphasizes the role of fiscal policy and monetarism emphasizes the role of money with IS-LM model.

A: Because the speculative demand of money is opposite to the interest rate, the LM curve is inclined to the upper right. When the interest rate rises to a considerable height, the interest loss caused by keeping idle money will become great, and the risk of capital loss caused by further increase in interest rates will become very small, which will make the speculative demand for money disappear completely. Money demand is completely generated by trading motives, so the money demand curve and LM curve present a vertical line shape, and the vertical LM curve area is considered as a classic area. When LM is vertical, the fiscal policy of changing budget revenue and expenditure cannot affect output and income. On the contrary, the monetary policy of changing the money supply plays a great role in national income, which is the viewpoint and proposition of the classical theory of money quantity. Monetarists believe that when people only have trading demand but no speculative demand, if the government adopts an expansionary monetary policy, all the increased money will be used to buy bonds instead of holding money for speculation. In this way, increasing the money supply will lead to a sharp rise in bond prices and a sharp drop in interest rates, which will greatly increase investment and income, so monetary policy is very effective. On the contrary, the policy of increasing government expenditure is completely ineffective, because when the expenditure increases, the increase of money demand will lead to a sharp rise in interest rates, which will have a great crowding-out effect, thus making the fiscal policy of increasing government expenditure extremely ineffective. Therefore, the classical school emphasizes the role of monetary policy, which IS manifested by the movement of IS curve (representing fiscal policy) in the vertical LM curve area, that is, the classical area will not affect output and income, while the movement of LM curve (representing monetary policy) has a great effect on output and income. Fiscal policy is ineffective in the classic LM region, and monetary policy is very effective in the classic LM region.

Keynesianism emphasizes fiscal policy because when the interest rate falls to a very low level, the interest loss of holding money is very small. However, if you buy money into bonds, the price of bonds will only fall and will not rise again, which makes the loss of monetary capital in buying bonds very risky. At this time, people refused to buy bonds even if they had spare money. In other words, the speculative demand for money has become very large, even infinite, and the economy has fallen into the so-called "flow preference trap" state. At this point, the money demand curve LM is horizontal. If the government increases expenditure, the IS curve will shift to the right, and the demand for money will increase, which will not cause the interest rate to rise and the "crowding out effect" will not occur, so the fiscal policy is extremely effective. On the contrary, if the government increases the money supply, it is impossible to further reduce interest rates and bond prices, and it is impossible to reduce interest rates and increase investment and national income by increasing the money supply, so monetary policy is invalid. Fiscal policy is ineffective in the Keynesian area of LM, but it is very effective in the Keynesian area of LM.