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Keynesian IS-LM

DEEPAK S.Y.B.M.S.

DEFINITION
ISLM model is a model describing the equilibrium in the economy in the goods market and money market. Model is derived in an analytical way (equations) and graphical (curves in the coordinate system). Graphically, the IS and LM curves constructed and analyzed in the coordinate system set by the income and interest rate.

IS curve
IS curve is a set of points, showing various combinations of income generated in the economy and interest rate at which the goods market is in equilibrium. Points lying outside the IS curve means the goods market imbalances of the economy

The IS CURVE-MARKET GOODS is shown GRAPHICALLY To derive the IS curve graphically, you need the following relations (graphs): Condition 1 First function long-term savings Condition 2 balance on the market goods S 45

S(Y)

45

I
Condition 3. dependency investment from interest rate I(r) r

r I(r)

r IS

I S

Y S 45

45

S(Y)

Equation 1:- Aggregate Demand AD = C + I + G+ NX(Y) Where AD is Aggregate Demand, C is Consumers Expenditure or Consumption, I is the level of Investment , G is the level of Government Expenditure, and NX(Y) represents net exports (exports minus imports) as a decreasing function of income.

The LM curve is the set of points, different combinations of incident produced in the economy of the income and the rate at which money market is in equilibrium.

The LM Curve is the Market of Money Graphical Representation To output the LM curve graphically, you need the following dependencies (charts)

MT

45

With the increase in income, the demand for money grows the transactions, but generally at a slower rate than the income
Balance the demand for money (trading and speculative) and money supply (L) PTO L1 50 45 20 150 L2 MT

MT(Y)

180

MS

The LM Curve is the Market of Money Graphical Representation To output the LM curve graphically, you need the following r dependencies (charts) Third demand relationship (investment) from interest rate speculation I(r)

MS

The LM Curve is the Market of Money Graphical Representation

r I(r)

r LM

MS MT

Y 45

45

MT

MT(Y)

MS

To analytically derive the LM curve is needed following relationship (equation):


M = (k y - h y) P where k - coefficient of sensitivity of demand to changes in the revenue transaction h - coefficient of speculative demand sensitivity to interest rate changes P - price level

MODEL IS-LM

The point of intersection of the IS and LM curves determines the level of income and the interest rate at which equilibrium is achieved at the same time in the goods market (aggregate demand equals aggregate supply) and the money market (money demand equals money supply). r IS

LM

r*

Y*

It is easy to check the chart IS-LM model, the effect of fiscal policy (increase revenue) is greater the flatter is the LM curve. At the same time the interest rate changes are then relatively small. We then say that fiscal policy is relatively more effective. Similarly, the effectiveness of monetary policy increases the more, the more the IS curve is flat. Changes in interest rates is relatively small, and large changes in income. This means that fiscal and monetary policy are interrelated.