Aggregate Demand: the IS-LM Model
IS-LM Model
"IS" stands for Investment and Saving. "LM" stands for Liquidity and Money.
The IS-LM model shows what causes income to change in the short term when the price level is fixed because all prices are sticky.
IS curve
The IS curve plots the relationship between the interest rate and the level of income that arises in the market for goods and services.
For tutoring information, call (954) 762-7742 or make an appointment for SAT, GMAT, CPT, ACT, Economics, Algebra, Statistics, Calculus, Spanish, French, English, or any other class.
Now, the top Miami educational investment
to change your grades!
Quality & academic excellence.
Students, click here for a Free Registration.
My goal is to present these concepts as clear as possible for your understanding.
 |
Interest Rate
Interest Rate affects both investment and money demand create interest rate the link between the two halves of the IS-LM curve.The Keynessian Main Idea
Keynes proposed that an economy's total income was in the short run determined by the spending plans of households, businesses, and government.Actual Expenditure
Actual Expenditure is the amount households, firms and goverment spend on goods and services which in turn is the gross domestic product (GDP)Make an appointment
Planned Expenditure
E = C(Y - T) + I +G
E as a function of income (Y), planned investment (I) and the fiscal policy G and T.
- Higher income leads to higher consumption and thus higher planned expenditure
- The positive slope of this function is the marginal propensity to consume (MPC)
- Currency-deposit ratio (cr) is the amount of currency C people hold as a fraction of their holdings of demands deposits D.
Government-purchases multiplier
δ Y/ δ G = 1 / (1-MPC)
If MPC is 0.6, the multiplier is 2.5. A $1 increase in goverment purchases raises equilibrium income by $2.50Based on Macroeconomics by Gregoy Mankiw
Make an appointment
Tell us your comments or questions about this topic for FREE.
For homeworks or test preparation, we'll reply by e-mail with a proposal fee for your approval.