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Chapter 11

Chapter 11. ISLM and ASAD. 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.

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Chapter 11

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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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