General Equilibrium Model: IS - LM

Introduction.

Variables and Parameters

Equations and Model

Equilibrium Values

Shifting Curves IS LM
 Introduction

Modern macroeconomics began with the petition of John M. Keynes ( 1936 ) in their
" General Theory of Employment, Interest and Money " in the sense that an economy
capitalist had no automatic tendency to bring the levels of income support
with full employment. John Hicks ( 1937 ) in his article entitled Econometric "Mr Keynes
and the Classics: A Suggested interpretation "plays Keynes's theory and draws two
curves : "IS - LM " to illustrate the interrelationships between demand theory
effective and the theory of liquidity preference .
These curves , known as the IS - LM were then developed by Alvin Hansen
( 1949.1953 ) . Since the crucial feature of the Keynesian system is the interaction
between actual and financial markets , Hicks and Hansen concentrated on developing
this model, it follows that the goods market income level ( Y) is extracted
and financial market interest rate ( i ) is obtained . These variables , in turn , affect
other components of the market , that is, in its simplest form , the entry affects
money demand and the interest rate affects investment .
The IS model - LM describes the causes and consequences of simultaneous equilbrio in
goods and money . The equilibrium is the unique combination of "Y" and "i"
achieves equilibrium in both markets.
This is a short-term model in which the prices of goods and factors
production are fixed . Also exogenously determined amount of money.
This model does not consider the variable " rate " or the " movements
autonomous capital "
 Equations and Model

Market of Goods

A* = C* + cTR* - cT* + I* + Gg* + X* - Q*

Alfa = 1 / (1 - c)(1 - t) + q

Y = alfa (A* - b i)

Money Market

M* / P* = L

L = kY - hi

M* / P* = kY - hi

i = 1/h (kY - M* / P*)

General Equilibrium

The intersection of the two curves corresponds to an equilibrium: the same interest rate
and the same level of guaranteed income balance. Therefore:

Y = Alfa x (A* - b / h x (kY - M* / P*))

Y = Gama x A* + Gama x b / h x M* / P* Where: Gama = Alfa / ( 1 + k x Alfa x b / h)

Then

i = k / h x Gama x A* - (1 / h + k x b x Alfa) x M* / P*

Go to Equations Home Page

 IS-LM Equilibrium Values

Variable Value

C 450
I 250
Gg 300 Modelo IS - LM
TR 25
i 2.00
T 250
t 0.25
1.50
c 0.8
b 30
1.00
q 0.1
X 150 0.50
Q 10
k 0.25 0.00
h 10 1810 1820 1830 1840 1850 1860 1870
Curva IS Y
M 1800
Curva LM
P 4

Cálculation: Equilibrium Values

A* = 960.0 Y = 1848 Gral. Equil.

Alfa = 2.0 i = 1.2

Go to: Determination Home Shift IS LM

 C Consumption
I Investment
Gg Government Expenditure
TR Trasnfers
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### q Marginal Propensity to Import
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M Money
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1/ h = P Prices
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M/P=
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Consumption

Government Expenditure

ndirect Taxes

Marginal Propensity to Consume

Sensibility to interest rate
Marginal Propensity to Import

Money Demand Sensibility to interest rate

Money Demand Sensibility to GDP
 Shifts in Curves IS LM

Market of Goods - IS
Changes in the components of aggregate demand directly affect
the goods market equilibrium. The ripple effect so restrictive as is given by the
multiplier. However, with M * / P * unchanged, up or decrease in the product must come
accompanied by an increase or decrease in the interest rate.

Variable Data New Data

C 450 480
I 250 250 Shift in IS
Gg 300 320 i 3.5
TR 25 25 3.0
T 250 250
2.5
t 0.25 0.25
c 0.8 0.8 2.0
b 30 30 1.5
q 0.1 0.1 1.0
X 150 150
0.5
Q 10 10
0.0
1800 1820 1840 1860 Original
1880IS 1900 1920 1940
Shifted IS Y
Curve LM
k 0.25 0.25
h 10 10
M 1800 1800
P 4 4

Calculation Equilibrium Values

Original Modified Original Modified

A* = 960.0 1010.0 Y = 1848 1888

Alfa = 2.0 2.0 i = 1.2 2.2

Go: Shift IS Home LM

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M Money
1920 1940 P Prices
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ensity to Consume

ensity to Import

d Sensibility to interest rate

d Sensibility to GDP
 Efectos sobre la Curva del Mercado Monetario - LM

Changes in the money supply, either by an increase or decrease it, if the price level
unchanged, the new equilibrium will imply a fall in the interest rate and income growth in
the first case, and an increase rate and decrease the product, in the second.

Variable Data New Data

C 450 450
I 250 250
Shift in LM
Gg 300 300 i 45.00
TR 25 25 40.00
T 250 250 35.00
t 0.25 0.25 30.00
25.00
c 0.8 0.8 20.00
b 30 30 15.00
q 0.1 0.1 10.00
X 150 150 5.00
0.00
Q 10 10
240 280 320
Curve IS
360 400
Original LM Y
Shifted LM

k 7 7
h 40 40
M 1800 2500
P 2 2

Calculation Equilibrium Values

Original Modified Original Modified

A* = 960.0 960.0 Y = 284 330

Alfa = 2.0 2.0 i = 27.3 26.5

Go to: Shift in IS Home LM

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### X Exports
360 400
Y
Q Imports
M
M k Money Demand Sensibility to inter
h Money Demand Sensibility to GDP
M Money
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Consumption

Government Expenditure

ndirect Taxes

Marginal Propensity to Consume

Sensibility to interest rate
Marginal Propensity to Import

Money Demand Sensibility to interest rate

Money Demand Sensibility to GDP