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Economics- ISLM Analysis , Study notes of Economics

The presentation covers - Deriving the IS curve - Deriving the LM curve - Equilibrium - ISLM analysis - Deriving an AD curve - ISLM analysis of fiscal and monetary policy

Typology: Study notes

2010/2011

Uploaded on 08/29/2011

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ISLM
ISLM Analysis
Analysis
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ISLMISLM AnalysisAnalysis

ISLM analysis

Deriving the IS curve

Injections, WithdrawalsO^ I 1 ( J 1 )

S 1 ( W 1 )

rate of^ Assume that an interest r 1 gives investment of I 1 and saving of S 1

Y 1

Rate of interest O

r 1

Goods market equilibrium: deriving the IS curve

Injections, Withdrawals

Rate of interest

O
O

r 1

I 1 ( J 1 )
S 1 ( W 1 )

rate of^ Assume that an interest r 1 gives investment of I 1 and saving of S 1

Y 1

Y 1

Goods market equilibrium: deriving the IS curve

Injections, Withdrawals

Rate of interest

O
O

r 1

I 1 ( J 1 )
S 1 ( W 1 )

Now assume that the interest rate falls to r 2 , giving investment of I 2 and saving of S 2

Y 1

Y 1
S I 22 (( WJ 2 ) 2 )
Y 2

r 2

a

Goods market equilibrium: deriving the IS curve

Injections, Withdrawals

Rate of interest

O
O

r 1

I 1 ( J 1 )
S 1 ( W 1 )

Now assume that the interest rate falls to r 2 , giving investment of I 2 and saving of S 2

Y 1

Y 1
S I 22 (( WJ 2 ) 2 )
Y 2

r 2

a

Goods market equilibrium: deriving the IS curve

Injections, Withdrawals

Rate of interest

O
O

r 1

I 1 ( J 1 )
S 1 ( W 1 )

Now assume that the interest rate falls to r 2 , giving investment of I 2 and saving of S 2

Y 1

Y 1
S I 22 (( WJ 2 ) 2 )
Y 2

r (^2) IS ( J = W )

b

a

Goods market equilibrium: deriving the IS curve

ISLM analysis

Deriving the LM curve

O O

Rate of interest Rate of interest Money National income^ Y^1

M S

L '

Assume that at a level of national income, Y 1 ,

the demand for money is L '

Money market equilibrium: deriving the LM curve

O O

Rate of interest Rate of interest Money National income^ Y^1

M S

r 1 L ' r 1

Assume that at a level of national income, Y 1 ,

the demand for money is L '

Money market equilibrium: deriving the LM curve

O O

Rate of interest Rate of interest Money National income^ Y^1

M S

r 1 r 1 Y 2

L^ L '"^ c

Now assume that at the higher level of national income, Y 2 ,

the demand for money rises to L "

Money market equilibrium: deriving the LM curve

O O

Rate of interest Rate of interest Money National income^ Y^1

M S

r^ r 12 rr^21 Y 2

L^ L '"^ c

Now assume that at the higher level of national income, Y 2 ,

the demand for money rises to L "

Money market equilibrium: deriving the LM curve

O O

Rate of interest Rate of interest Money National income^ Y^1

M S^ LM

r^ r 12 rr^21 Y 2

L^ L '"^ c

d

Now assume that at the higher level of national income, Y 2 ,

the demand for money rises to L "

Money market equilibrium: deriving the LM curve

ISLM analysis

Equilibrium