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    Thảo Nguyễn Thị Thu
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    1) The goods market is in equilibrium when aggregate demand equals actual income, as shown by the IS schedule. The money market is in equilibrium when the demand for money equals the supply, as shown by the LM schedule. 2) The intersection of the IS and LM schedules shows the unique combination of interest rates and income that ensures equilibrium in both markets. 3) Fiscal policy like increased government spending shifts the IS curve to the right, increasing income and interest rates. Monetary policy like increased money supply shifts the LM curve to the right, lowering interest rates and increasing income.

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    1) The goods market is in equilibrium when aggregate demand equals actual income, as shown by the IS schedule. The money market is in equilibrium when the demand for money equals the supply, as shown by the LM schedule. 2) The intersection of the IS and LM schedules shows the unique combination of interest rates and income that ensures equilibrium in both markets. 3) Fiscal policy like increased government spending shifts the IS curve to the right, increasing income and interest rates. Monetary policy like increased money supply shifts the LM curve to the right, lowering interest rates and increasing income.

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    3 views2 pages

    Mac 6

    Uploaded by

    Thảo Nguyễn Thị Thu
    1) The goods market is in equilibrium when aggregate demand equals actual income, as shown by the IS schedule. The money market is in equilibrium when the demand for money equals the supply, as shown by the LM schedule. 2) The intersection of the IS and LM schedules shows the unique combination of interest rates and income that ensures equilibrium in both markets. 3) Fiscal policy like increased government spending shifts the IS curve to the right, increasing income and interest rates. Monetary policy like increased money supply shifts the LM curve to the right, lowering interest rates and increasing income.

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    © All Rights Reserved
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    of 2

    Goods market equilibrium

    The goods market is in equilibrium when


    the aggregate demand and actual
    IS – LM model income are equal

    The IS schedule shows the different


    combinations of income and interest
    rates at which the goods market is in
    equilibrium.

    1 2

    The IS schedule Money market equilibrium

    At a relatively high interest


    The money market is in equilibrium
    45o line when the demand for real money
    AD1 rate r0, consumption and
    investment are relatively balances is equal to the supply.
    AD0 low – so AD is also low.
    Equilibrium is at Y0.
    At a lower interest rate r1 The LM schedule shows the different
    Consumption, investment combinations of income and interest
    Y0 Y1 and AD are higher.
    r
    Income
    rates at which the money market is in
    Equilibrium is at Y1.
    r0 equilibrium.
    The IS schedule shows all
    the combinations of real
    r1
    income and interest rate
    IS
    at which the goods market
    Y0 Y1 Income
    is in equilibrium. 3 4

    The LM schedule Shifting IS and LM schedules

    r r The position of the IS schedule


    LM depends upon:
    r1
    r1 anything (other than interest rates) that
    r0 shifts aggregate demand: e.g.
    r0
    • autonomous consumption
    LL1 (Y1)
    LL0 (Y0) • autonomous investment
    • government spending
    L0 Real money Y0 Y1 Income
    balances The position of the LM schedule
    At income Y0, money demand is at LL0 and equilibrium depends upon
    in the money market requires an interest rate of r0.
    money supply
    At Y1, money demand is at LL1,and equilibrium is at r1.
    The LM schedule traces out the combinations of real income
    5 6
    and interest rate in which the money market is in equilibrium.
    1
    Equilibrium in goods and
    money markets Fiscal policy in the IS-LM model
    Y0, r0 represents the
    r Bringing together the r initial equilibrium.
    LM IS schedule (showing LM When government
    goods market equilibrium)
    r1 spending (G) increases,
    r* and the LM schedule r0 the IS curve shifts to the
    (showing money market right, from IS0 to IS1.
    equilibrium). IS1
    Equilibrium is now at
    IS We can identify the IS0 r , Y .
    1 1
    unique combination of
    real income and interest
    Some private spending
    Y* Income Y0 Y1 Income has been crowded out
    rate (r*, Y*) which ensures
    overall equilibrium. by the increase in the
    7 rate of interest. 8

    Monetary policy in the IS-LM Fiscal policy and monetary policy


    model Using monetary and fiscal policy together to stabilize
    Y0, r0 represents the the level of income around a high average level.
    r LM0 initial equilibrium. Income level Y* can
    r be attained by:
    LM1 An increase in money LM1
    r0 supply shifts the LM
    LM0
    schedule to the right.
    r1
    r1
    Equilibrium is now ‘easy’ fiscal
    IS0 at r1, Y1. r2 policy (IS1) with ‘tight’
    monetary policy (LM1).
    IS1
    Y0 Y1 Income
    IS0

    9 Y* Income
    10

    Fiscal policy and monetary policy


    Using monetary and fiscal policy together to stabilize
    the level of income around a high average level.
    Income level Y* can
    r be attained by:
    LM0
    LM1

    r1 ‘Tight’ fiscal policy (IS1)


    r2 with ‘easy’ monetary
    policy (LM1)
    IS0
    IS1
    Y* Income
    11
    2

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