Is lm model (1) analysis

IS-LM MODEL The Economics of Money, Banking, and Financial Markets7th

Frederic S. Mishkin

J

what is IS-LM Model?

The Economics of Money, Banking, and

Financial Markets7th

• Economics Crystal ball.

• Tool for deeper understanding Government policy & GDP movements.

• John Hicks 1937.



Determination of Aggregate Output.

› Keynesian recognitions:

› Y=Yad ƒ(C+I+G+NX).

› Keynesian analysis simplification.

- Fixed price level.

- Planned investment (known value).

- Gradually assessment addition.




› Equilibrium and Keynesian cross diagram.




›Do not forget:

- Up ward slopping (MPC).

- Multiplier affect.

- What if NX added (100$).



Equilibrium in good market (driving IS curve).

› interest rate & planned investment.- Fund deficit.

- Fund surplus.

› Interest rate & net export.

› Interest rate & aggregate out-put.



Equilibrium in good market (driving IS curve).



What is IS curve tell us?

› Good market clearance.

› Equilibrium level of out-put, given interest rate.

- Good market excess supply.

- Good market excess demand.

› Note: no unique out-put level.



Equilibrium in money market (driving LM curve).

› Equilibrium condition:

M.D = M.S

› Main building blocks:

- Liquidity preferences theory.

Money demand determents:

• Interest rate.

• income.



Equilibrium in money market (driving LM curve).



What is LM curve tell us?

› Money market clearance.

› Equilibrium level of interest rate, given level of

out- put.

- Excess money supply.

- Excess money demand.

› Note: no unique interest rate.



IS-LM determination aggregate out-put and

interest rate.

› Equilibrium in both

markets(IS-LM curves

intersection)

› Market forces to ward

General Equilibrium.



Factors causes IS curve to shift.

› Change in:

- Autonomous consumer expenditure.

- Investment spending (unrelated to interest rate).

- Net export (unrelated to interest rate).

- Government spending or taxes.



Factors causes IS curve to shift.



Factors causes IM curve to shift.

› Change in Money supply.



Factors causes IM curve to shift.

› Change in Autonomous Money demand.



Change in equilibrium level, interest rate and

aggregate out-put.

› Response to change in fiscal policy.

› Response to change in monetary policy.



Monetary policy VS Fiscal policy

› Solving high unemployment:

- Using fiscal policy.

- Using monetary policy.

› Conclusion.




› Stable IS curve.

- Targeting interest rate.

- Targeting money supply.




› Stable LM curve.

- Interest rate targeting.

- Money supply targeting.



IS-LM model in long run.

› Response to money supply.

› Response to government spending.



Driving aggregate demand curve.



Factors shift Aggregate demand curve.

› Shift in IS curve (is curve factors).



Factors shift Aggregate demand curve.

› Shifts in LM curve.



Mathematics on board

- Multiplayer affect.

- Solving IS-LM equations.

Is lm model (1) analysis

Economy & Finance

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