ISLM
ISLM Analysis
Analysis
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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
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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