Professional Documents
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Goods and
Financial Markets:
The IS-LM Model
Prepared by:
Fernando Quijano and Yvonn
Quijano
I I (Y , i )
I I (Y , i )
Taking into account the investment relation
above, the equilibrium condition in the goods
market becomes:
Y C (Y T ) I (Y , i ) G
The Effects of an
Increase in
the Interest Rate on
Output
An increase in the
interest rate decreases
the demand for goods at
any level of output.
Shifts of the IS
Curve
An increase in taxes
shifts the IS curve to
the left.
The Effects of an
Increase in Income on
the Interest Rate
An increase in income
leads, at a given interest
rate, to an increase in
the demand for money.
Given the money
supply, this leads to an
increase in the
equilibrium interest rate.
Shifts of the LM
Curve
An increase in
money leads the
LM curve to shift
down.
The Effects of an
Increase in Taxes
An increase in taxes
shifts the IS curve to
the left, and leads to
a decrease in the
equilibrium level of
output and the
equilibrium interest
rate.
The Effects of a
Monetary Expansion
Monetary expansion
leads to higher
output and a lower
interest rate.
Interest rate (%) 7.3 5.5 3.7 3.3 5.0 5.6 5.2 4.8