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ISLM analysis

Deriving the IS curve

**Goods market equilibrium: deriving the IS curve
**

Injections, Withdrawals

Assume that an interest rate of r1 gives investment of I1 and saving of S1 S1 (W1)

O

I1 (J1)

Rate of interest

r1

O

**Goods market equilibrium: deriving the IS curve
**

Injections, Withdrawals

Assume that an interest rate of r1 gives investment of I1 and saving of S1 S1 (W1)

O

I1 (J1) Y1

Rate of interest

r1

O

Withdrawals Assume that an interest rate of r1 gives investment of I1 and saving of S1 S1 (W1) O I1 (J1) Y1 Rate of interest r1 O Y1 .Goods market equilibrium: deriving the IS curve Injections.

Withdrawals Assume that an interest rate of r1 gives investment of I1 and saving of S1 S1 (W1) O I1 (J1) Y1 Rate of interest r1 a O Y1 .Goods market equilibrium: deriving the IS curve Injections.

Goods market equilibrium: deriving the IS curve Injections. giving investment of I2 and saving of S2 S1 (W1) S2 (W2) I2 (J2) I1 (J1) Y1 Y2 O Rate of interest r1 r2 a O Y1 . Withdrawals Now assume that the interest rate falls to r2.

giving investment of I2 and saving of S2 S1 (W1) S2 (W2) I2 (J2) I1 (J1) Y1 Y2 O Rate of interest r1 r2 a O Y1 . Withdrawals Now assume that the interest rate falls to r2.Goods market equilibrium: deriving the IS curve Injections.

giving investment of I2 and saving of S2 S1 (W1) S2 (W2) I2 (J2) I1 (J1) Y1 Y2 O Rate of interest r1 r2 a b O Y1 .Goods market equilibrium: deriving the IS curve Injections. Withdrawals Now assume that the interest rate falls to r2.

Goods market equilibrium: deriving the IS curve Injections. Withdrawals Now assume that the interest rate falls to r2. giving investment of I2 and saving of S2 S1 (W1) S2 (W2) I2 (J2) I1 (J1) Y1 Y2 O Rate of interest r1 r2 a b IS (J = W) Y1 O .

ISLM analysis Deriving the LM curve .

Y1. the demand for money is L' Rate of interest L' O Money Rate of interest O Y1 National income .Money market equilibrium: deriving the LM curve Assume that at a level of national income.

Y1. the demand for money is L' MS Rate of interest L' O Money Rate of interest O Y1 National income .Money market equilibrium: deriving the LM curve Assume that at a level of national income.

the demand for money is L' MS Rate of interest r1 L' O Money Rate of interest r1 O Y1 National income . Y1.Money market equilibrium: deriving the LM curve Assume that at a level of national income.

Y1. the demand for money is L' MS Rate of interest Rate of interest r1 L' O Money r1 c O Y1 National income .Money market equilibrium: deriving the LM curve Assume that at a level of national income.

the demand for money rises to L" MS Rate of interest Rate of interest r1 L" L' r1 c O Money O Y2 Y1 National income .Money market equilibrium: deriving the LM curve Now assume that at the higher level of national income. Y2.

Y2.Money market equilibrium: deriving the LM curve Now assume that at the higher level of national income. the demand for money rises to L" MS Rate of interest r2 r1 L" L' Rate of interest r2 r1 c O Money O Y2 Y1 National income .

Money market equilibrium: deriving the LM curve Now assume that at the higher level of national income. Y2. the demand for money rises to L" MS Rate of interest Rate of interest r2 r1 L" L' r2 r1 d c O Money O Y2 Y1 National income .

Money market equilibrium: deriving the LM curve Now assume that at the higher level of national income. Y2. the demand for money rises to L" MS LM Rate of interest Rate of interest r2 r1 L" L' r2 r1 d c O Money O Y2 Y1 National income .

ISLM analysis Equilibrium .

Equilibrium in both the goods and money markets LM Rate of interest IS O National income .

Equilibrium in both the goods and money markets LM Assume that national income is currently at a level of Y1 Rate of interest a IS O Y1 National income .

Equilibrium in both the goods and money markets LM This gives a rate of interest of r1 (point a) Rate of interest r1 a IS O Y1 National income .

Equilibrium in both the goods and money markets LM But at r1. national income is below the goods market equilibrium level (Y2) Rate of interest r1 a b IS O Y1 Y2 National income .

Equilibrium in both the goods and money markets But as income rises. thereby reducing national income below Y2. so there will be a movement up the LM curve. The interest rate will rise. LM Rate of interest r1 a b IS O Y1 Y2 National income .

Equilibrium in both the goods and money markets LM Rate of interest re IS O Ye National income .

ISLM analysis ISLM analysis of changes in goods and money markets .

ISLM analysis of changes in the goods and money markets LM Rate of interest r1 IS O Y1 National income .

ISLM analysis of changes in the goods and money markets LM A rise in injections Rate of interest r2 r1 IS2 IS1 O Y1 Y2 National income .

ISLM analysis of changes in the goods and money markets LM1 A rise in the money supply Rate of interest LM2 r1 r3 IS O Y1 Y3 National income .

ISLM analysis of changes in the goods and money markets A rise in both injections and money supply Rate of interest LM1 LM2 r1 IS2 IS1 O Y1 National income Y4 .

ISLM analysis Deriving an AD curve from an ISLM diagram .

Deriving the AD curve from an ISLM diagram Rate of interest (r) LM1 r1 a IS National income (Y) Y1 Price level (P) P1 a' National income (Y) Y1 .

Deriving the AD curve from an ISLM diagram Rate of interest (r) LM2 b a LM1 r2 r1 IS National income (Y) Y2 Y1 Price level (P) P2 P1 b' a' AD National income (Y) Y2 Y1 .

ISLM analysis ISLM analysis of fiscal and monetary policy .

ISLM analysis of fiscal and monetary policy LM Rate of interest r1 IS O Y1 National income .

ISLM analysis of fiscal and monetary policy LM Expansionary fiscal policy Rate of interest r2 r1 IS2 IS1 O Y1 Y2 National income .

ISLM analysis of fiscal and monetary policy LM1 Expansionary monetary policy Rate of interest LM2 r1 r3 IS O Y1 Y3 National income .

ISLM analysis of fiscal and monetary policy Expansionary fiscal and monetary policy Rate of interest LM1 LM2 r1 IS2 IS1 O Y1 National income Y4 .

ISLM analysis Keynesian analysis of fiscal and monetary policy .

Keynesian analysis of fiscal and monetary policy Rate of interest LM Expansionary fiscal policy IS2 O IS1 Y1 Y2 National income .

Keynesian analysis of fiscal and monetary policy Expansionary monetary policy Rate of interest LM1 LM2 IS O Y1 Y2 National income .

ISLM analysis Monetarist analysis of fiscal and monetary policy .

Monetarist analysis of fiscal and monetary policy LM Rate of interest Expansionary fiscal policy IS2 IS1 O Y1Y2 National income .

Monetarist analysis of fiscal and monetary policy LM1 LM2 Expansionary monetary policy Rate of interest IS O Y1 Y2 National income .

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