Is-LM-Analysis 17 March 2010
Transcript of Is-LM-Analysis 17 March 2010
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ISLM analysisISLM analysis
EquilibriumEquilibrium
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O
Rateofintere
st
National income
LM
IS
Equilibrium in both the goods and money marketsEquilibrium in both the goods and money markets
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O
Rateofintere
st
National income
IS
Y1
a
Assume that national income
is currently at a level ofY1
LM
Equilibrium in both the goods and money marketsEquilibrium in both the goods and money markets
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O
Rateofintere
st
National income
IS
r1
Y1
a
This gives a rate of
interest ofr1 (point a)
LM
Equilibrium in both the goods and money marketsEquilibrium in both the goods and money markets
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O
Rateofintere
st
National income
IS
r1
Y1 Y2
a
Butat r1, national income
is below the goods market
equilibrium level (Y2)
b
LM
Equilibrium in both the goods and money marketsEquilibrium in both the goods and money markets
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Butas income rises, so there
will be a movement up the
LMcurve. The interest rate
will rise, thereby reducing
national income below Y2.
O
Rateof
intere
st
National income
IS
r1
Y1 Y2
a b
LM
Equilibrium in both the goods and money marketsEquilibrium in both the goods and money markets
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O
Rateof
intere
st
National income
IS
re
Ye
LM
Equilibrium in both the goods and money marketsEquilibrium in both the goods and money markets
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ISLM analysisISLM analysis
ISLM analysis ofchanges in goods
and money markets
ISLM analysis ofchanges in goods
and money markets
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O
Rateof
intere
st
National income
LM
IS
r1
Y1
ISLManalysis of changes in the goods and money marketsISLManalysis of changes in the goods and money markets
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O
Rateof
intere
st
National income
IS1
r1
Y1
IS2
r2
Y2
A rise ininjections
LM
ISLManalysis of changes in the goods and money marketsISLManalysis of changes in the goods and money markets
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O
Rateof
intere
st
National income
LM1
IS
r1
Y1
LM2
r3
Y3
A rise in themoney supply
ISLManalysis of changes in the goods and money marketsISLManalysis of changes in the goods and money markets
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LM2LM1
O
Rateof
intere
st
National income
IS1
r1
Y1
IS2
Y4
A rise in both
injections and
money supply
ISLManalysis of changes in the goods and money marketsISLManalysis of changes in the goods and money markets
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ISLM analysisISLM analysis
Deriving an AD curve
from an ISLM diagram
Deriving an AD curve
from an ISLM diagram
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Rateof
interes
t(r
)
Pricele
vel(P
)
National income (Y)
National income (Y)
LM1
IS
Y1
r1
P1
Deriving theAD curve from an ISLMdiagramDeriving theAD curve from an ISLMdiagram
Y1
a'
a
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Rateof
in
teres
t(r
)
Pricele
vel(P
)
National income (Y)
LM1LM2
IS
AD
Y1
Y1Y2
r2
r1
P2
P1
Deriving theAD curve from an ISLMdiagramDeriving theAD curve from an ISLMdiagram
a'
a
Y2
b'
b
National income (Y)
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ISLM analysisISLM analysis
ISLM analysis offiscal and
monetary policy
ISLM analysis offiscal and
monetary policy
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O
Rateof
intere
st
National income
LM
IS
r1
Y1
ISLManalysis of fiscal and monetary policyISLManalysis of fiscal and monetary policy
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O
Rateof
intere
st
National income
IS1
r1
Y1
IS2
r2
Y2
Expansionary
fiscal policy
LM
ISLManalysis of fiscal and monetary policyISLManalysis of fiscal and monetary policy
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LM2LM1
O
Rateof
intere
st
National income
IS1
r1
Y1
IS2
Y4
Expansionary
fiscal and
monetary policy
ISLManalysis of fiscal and monetary policyISLManalysis of fiscal and monetary policy
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ISLM analysisISLM analysis
Keynesian analysis offiscal and
monetary policy
Keynesian analysis offiscal and
monetary policy
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O
Rateof
intere
st
National income
LM
IS1Y1
IS2
Y2
Expansionary
fiscal policy
Keynesian analysis of fiscal and monetary policyKeynesian analysis of fiscal and monetary policy
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O
Rateof
intere
st
National income
LM1
ISY1Y2
Expansionarymonetary policy
LM2
Keynesian analysis of fiscal and monetary policyKeynesian analysis of fiscal and monetary policy
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ISLM analysisISLM analysis
Monetarist analysis offiscal and
monetary policy
Monetarist analysis offiscal and
monetary policy
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O
Rateof
intere
st
National income
LM
IS1
Y1Y2
Expansionary
fiscal policy
IS2
Monetarist analysis of fiscal and monetary policyMonetarist analysis of fiscal and monetary policy
f f
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O
Rateof
intere
st
National income
LM1
IS
Y1 Y2
Expansionary
monetary policy
LM2
Monetarist analysis of fiscal and monetary policyMonetarist analysis of fiscal and monetary policy
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Fiscal Policy, the Interest Rate and the IS CurveFiscal Policy, the Interest Rate and the IS Curve
The Effects of anThe Effects of an
Increase in TaxesIncrease in Taxes
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Monetary Policy, the Interest Rate, and the LM CurveMonetary Policy, the Interest Rate, and the LM Curve
sMonetary contraction(tightening) refers to a decreasein the money supply.
s
An increase in the moneysupply is called monetaryexpansion.
sMonetary policy affects onlythe LMcurve, not the IScurve.
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Monetary Policy, the Interest Rate, and the LM CurveMonetary Policy, the Interest Rate, and the LM Curve
The Effects of aThe Effects of a
Monetary ExpansionMonetary Expansion