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Understanding ISLM and ASAD Model in Macroeconomics

Learn about how economic variables impact the macroeconomy through the ISLM and ASAD model, which analyzes goods and financial assets markets' behavior and equilibrium. Explore IS and LM components, and AS determinants.

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Understanding ISLM and ASAD Model in Macroeconomics

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  1. Chapter 11 ISLM and ASAD

  2. ISLM – Model that shows the impact a change of an economic variable has on the macroeconomy • A model of behavior in the market for goods and services and in the market for financial assets. • Economists refer to general equilibrium as an outcome in which all the markets in the economy are in equilibrium at the same time. • The goods market includes trade in all goods and services that the economy produces at a particular point in time. • The money market includes trade in all assets used as the medium of exchange. • The nonmoney asset market includes trades of assets other than money that are stores of value.

  3. Components • IS – Investment Saving Line: The IS curve shows how aggregate demand for output responds to changes in interest rates and summarizes the equilibrium in the goods market. • Components (Shifting the IS) • Consumption • Investment • Government Spending • Taxes • Net Exports

  4. LM – Liquidity of Money: The LM curve is the set of combinations of current output and the real interest rate for which the money market is in equilibrium • Components (Shifting the LM) • Money Supply • Money Demand • Aggregate Supply determinants also shift the LM • Resource Prices • Productivity • Expectations • Legislation • Supply Shocks

  5. ISLM and ASAD Equilibrium IR PL LM AS AD IS GDP GDP

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