The IS- LM Model Part III

Intersection of IS- LM curves

At the point of intersection of the IS

and Lm curves, the rate of interest
and the income are related in such a
way that :
1)The goods market is in equilibrium
i.e Agg demand= aggregate output.
2)The money market is also in
equilibrium i.e. demand for money is
in equilibrium with the supply of
money.

The IS- Lm curve analysis has

succeeded in synthesizing the
monetary and fiscal policies.
With the IS-LM curve analysis, we are
better able to explain the effect of
changes in certain important
economic variables such as desire to
save, the supply of money,
investment, demand for money on the
rate of interest and level of income.

Effect of changes in the supply of

money on the rate of interest and
income level:
When supply of money increases,
rate of interest falls and Y increases.
When supply of money decreases,
the rate of interest increases and Y
decreases.

Changes in the desire to Save or

propensity to consume:
The increase in mpc moves the AD
curve up increasing the national
income. This moves the IS curve to
the right and moves up the rate of
interest at the equilibrium level.

Changes in autonomous investment

and government expenditure:
Increases the investment expenditure
increasing the agrregate demand. IS
curve moves to the right and
increases the rate of interest and
national income.

Changes in demand for money or

liquidity preference:
Affects the LM curve. Increase in
money demand moves the LM curve
to the left. Thus the equilibrium rate
of interest will rise and national
income will fall.
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