LEONARD F. S. WANG PudM uniuersity IS- LM Stability and Economic Policy Effectiveness: A /Vote Accepting the findings of Weber (1970) and Yarrow (1975), Cebula finds that conventional fiscal policy has its usual positive effect on the level of income while monetary policy has a negative impact. This paper shows that if a budget constraint of the specific, simplified form G - T = AM is added to the model, the results differ from Cebula’s. 1. Introduction Two recent studies by Weber (1970) and Yarrow (1975) have cast doubt upon the conventional treatment of the interest sensitivity of consumption and investment spending. In particular, Weber has argued that, on balance, consumption is directly related to the interest rate. Yarrow, in turn, finds that for growth-maximizing, firm investment may be an increasing function of the rate of interest. Cebula (1976) examined, within a short-run IS-L M model, the implications of these two findings for the effectiveness of monetary policy and of fiscal policy in pursuing full employment in a closed economy. He concludes that fiscal policy may be superior to monetary policy for pursuing domestic full employment, given the model is stable. In essence, conventional fiscal policy has its usual positive effect on the level of income while monetary policy has a negative impact. This note is an extension of Cebula’s analysis whereby we have reformulated the government sector in the spirit of Christ’s (1968) analysis of government budget constraint. 2. The Model A short-run Hicks IS-LM model will be used for the analysis of economic policy impact. It consists of the following two equa- tions: Y = c(Yd,i) + Z(Y,i) + G, (1) where Journal of Macroeconomics, Spring 1980, Vol. 2, No. 2, pp. 175-179 175 0 Wayne State University Press, 1980.