Addendum to my post on the Hicks model...

As promised, as my understanding of IS/LM grows, I plan to add to my commentary on it. So, here's the deal -- I was talking about the zero lower bound and how the IS curve shifts to the left, to a point where the LM curve is flat. In essence. what's going on is that the given interest rate in order to achieve full employment has gone negative -- the "liquidity trap". In other words, the LM curve goes horizontal (since the vertical axis is interest rates) because it is not possible for nominal rates to go negative, even though that's what the model is telling us is needed for full employment. Thus, in such a scenario, the Keynesian belief is that the act of government spending to increase aggregate demand should not cause rates to rise, and there will be no crowding out. In the liquidity trap, desired savings is greater than desired investment, so the government is simply making use of those excess funds. The image below hopefully clarifies that point (pulled from a Krugman piece).