Macroeconomics II

24. Oct. 2023

 Today’s Talk
• Today’s topic is “Goods and Financial Markets.”
• The goals of today’s class is to understand the simultaneous equilibria in
both markets.
 IS curve
• Remember what we learned in last two classes.
• We characterized equilibrium in the goods market as the condition that
aggregate supply, , is equal to aggregate demand, .
• The equilibrium condition of the goods market becomes
 IS curve
• The equilibrium of the goods

• The decision of household

• From these two equations above, we obtain the relation

 IS curve
𝑖
• Here, we consider the relation
between the interest rate and
investment.
• Suppose that interest rate increased
from to .
• Then, investment fall from to .

0 𝐼
 IS curve
• Decreased investment from to
lowers income (output) from to .

0 𝑌
 IS curve
𝑖 • Interest rate
• Investment
• Income
⇒ Income, , is a decreasing function of the
interest rate, .

IS curve is the relation between the interest

𝑌 rate and income such that aggregate demand
0
equals aggregate supply.
 LM curve
• Recall that the financial market equilibrium is characterized as the
condition that money supply, , is equal to money demand, .
 LM curve
𝑖
• An increase in income () leads to
an increase in the demand for
money ().
• Suppose that the money supply is
given, then the interest rate must
go up from to .

0 𝑀
 LM curve
𝑖 • Income
• Interest rate
⇒ Income , is an increasing function of the
interest rate, .

LM curve is the relation between the

interest rate and income such that money
𝑌 demand equals money supply.
0
 LM curve
𝑖 • The equilibrium of the economy is the
situation in which both goods and
financial markets are in equilibrium.
• That is, the equilibrium is the intersection
point, , of IS and LM curves.

0 𝑌