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Understanding IS-LM Model: Goods and Assets Markets in Macroeconomics

The IS-LM model explores the interaction between income and assets markets through the IS curve and LM curve. Learn about goods market equilibrium, money supply and demand, and the effects of fiscal and monetary policies.

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Understanding IS-LM Model: Goods and Assets Markets in Macroeconomics

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Presentation Transcript

  1. Chapter EightIS-LM Model

  2. The Structure of the IS-LM Model Income Assets Markets Goods Market Money Demand Money Supply Output AD= C+I+G+NX Monetary policy Fiscal policy

  3. 1. The Goods Market and the IS Curve • IS Curve: Definition • Investment and the Interest Rate • The Investment Demand Schedule • The Interest Rate and AD: • The IS Curve • Derivation of the IS Curve The Slope of the IS Curve The Position of the IS Curve Positions off the IS Curve

  4. AD E2 AD2 AD1 E1 Y Y1 Y2 i E1 i 1 IS Curve E2 i 2 Y Y1 Y2

  5. E2’ AD2 AD E2 AD1 E1’ E1 Y O Y1 Y2

  6. i A Shift in the IS Curve △Y = α△A E1’ E1 E2’ E2 IS’ IS Y Y1 Y2 Y1’ Y2’

  7. 2. The Assets Markets and the LM Curve • LM Curve: Definition • The Wealth Constraint • Money: Demand and Supply • The curve of the money demand • Money Market Equilibrium and the LM Curve

  8. i i L’ LM Derivation of the LM Curve L E2 i2 E2 E1 i1 E1 L M/P Y1 Y2 Y

  9. Derivation of the LM Curve • The Slope of the LM Curve • The Position of the LM Curve • Positions off the LM Curve 3. Simultaneous Equilibrium in the Goods and Assets Markets: IS-LM Model

  10. A Shift in the LM Curve i i Ms1 LM Ms L’ LM1 L E2 E1 E2’ E1’ Y Y1 Y2 L/Ms

  11. Changes in the Equilibrium Levels • Adjustment Toward Equilibrium Two Assumptions Disequilibrium and Adjustment Characters of the Adjustment Process

  12. Chapter NineMonetary and Fiscal Policy 1. Monetary Policy • The Effects of the Change in Money Supply • The Transmission Mechanism • The Liquidity Trap • The classical Case

  13. 2. Fiscal Policy and Crowding Out • An Increase in Government Spending • Crowding Out Effects • The Extent of Crowding Out • The Liquidity Trap • The Classical Case and Crowding Out

  14. i IS’ LM Crowding out effects IS Y

  15. Is Crowding Out Likely? An Economy with Unemployment Monetary Accommodation An Fully Employed Economy 3. The Policy Choice and Mix • Policy Choice • The Mix of Fiscal and Monetary Policy

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