Is Lm Analysis
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ISLM Analysis
ISLM analysis
Deriving the IS curve
Injections, Withdrawals
Goods market equilibrium: deriving the IS curve Assume that an interest rate of r1 gives investment of I1 and saving of S1 S1 (W1)
Rate of interest
O
r1
O
I1 (J1)
Injections, Withdrawals
Goods market equilibrium: deriving the IS curve Assume that an interest rate of r1 gives investment of I1 and saving of S1 S1 (W1)
Rate of interest
O
r1
O
I1 (J1) Y1
Injections, Withdrawals
Goods market equilibrium: deriving the IS curve Assume that an interest rate of r1 gives investment of I1 and saving of S1 S1 (W1)
Rate of interest
O
I1 (J1) Y1
r1
O
Y1
Injections, Withdrawals
Goods market equilibrium: deriving the IS curve Assume that an interest rate of r1 gives investment of I1 and saving of S1 S1 (W1)
Rate of interest
O
I1 (J1) Y1
a
r1
O
Y1
Injections, Withdrawals
Goods market equilibrium: deriving the IS curve Now assume that the interest rate falls to r2, giving investment of I2 and saving of S2 S1 (W1) S2 (W2)
Rate of interest
O
I2 (J2) I1 (J1) Y1
a
r1 r2
O
Y2
Y1
Injections, Withdrawals
Goods market equilibrium: deriving the IS curve Now assume that the interest rate falls to r2, giving investment of I2 and saving of S2 S1 (W1) S2 (W2)
Rate of interest
O
I2 (J2) I1 (J1) Y1
a
r1 r2
O
Y2
Y1
Injections, Withdrawals
Goods market equilibrium: deriving the IS curve Now assume that the interest rate falls to r2, giving investment of I2 and saving of S2 S1 (W1) S2 (W2)
Rate of interest
O
I2 (J2) I1 (J1) Y1
a
r1
b
r2
O
Y2
Y1
Injections, Withdrawals
Goods market equilibrium: deriving the IS curve Now assume that the interest rate falls to r2, giving investment of I2 and saving of S2 S1 (W1) S2 (W2)
Rate of interest
O
I2 (J2) I1 (J1) Y1
a
r1
b
r2
O
Y2
IS (J = W) Y1
ISLM analysis
Deriving the LM curve
Money market equilibrium: deriving the LM curve Assume that at a level of national income, Y1,
L' O
Rate of interest
Rate of interest
the demand for money is L'
O Money
Y1 National income
Money market equilibrium: deriving the LM curve Assume that at a level of national income, Y1, the demand for money is L'
L' O
Rate of interest
Rate of interest
MS
O Money
Y1 National income
Money market equilibrium: deriving the LM curve Assume that at a level of national income, Y1, the demand for money is L'
r1 L' O
Rate of interest
Rate of interest
MS
r1
O Money
Y1 National income
Money market equilibrium: deriving the LM curve Assume that at a level of national income, Y1, the demand for money is L'
r1 L' O
Rate of interest
Rate of interest
MS
r1
O Money
c
Y1 National income
Money market equilibrium: deriving the LM curve Now assume that at the higher level of national income, Y2, the demand for money rises to L"
r1
L" L'
O
Rate of interest
Rate of interest
MS
r1
O Money
c
Y2 Y1 National income
Money market equilibrium: deriving the LM curve Now assume that at the higher level of national income, Y2, the demand for money rises to L"
r2 r1
L" L'
O
Rate of interest
Rate of interest
MS
r2 r1
O Money
c
Y2 Y1 National income
Money market equilibrium: deriving the LM curve Now assume that at the higher level of national income, Y2, the demand for money rises to L"
r2 r1
L" L'
O
Rate of interest
Rate of interest
MS
r2 r1
O Money
d c
Y2 Y1 National income
Money market equilibrium: deriving the LM curve Now assume that at the higher level of national income, Y2, the demand for money rises to L" LM
r2 r1
L" L'
O
Rate of interest
Rate of interest
MS
r2 r1
O Money
d c
Y2 Y1 National income
ISLM analysis
Equilibrium
Equilibrium in both the goods and money markets
Rate of interest
LM
IS O National income
Equilibrium in both the goods and money markets LM
Rate of interest
Assume that national income is currently at a level of Y1
a
IS O
Y1 National income
Equilibrium in both the goods and money markets LM
Rate of interest
This gives a rate of interest of r1 (point a)
r1
a
IS O
Y1 National income
Equilibrium in both the goods and money markets LM
Rate of interest
But at r1, national income is below the goods market equilibrium level (Y2)
r1
a
b
IS O
Y1
Y2 National income
Equilibrium in both the goods and money markets LM
Rate of interest
But as income rises, so there will be a movement up the LM curve. The interest rate will rise, thereby reducing national income below Y2.
r1
a
b
IS O
Y1
Y2 National income
Equilibrium in both the goods and money markets
Rate of interest
LM
re
IS O
Ye National income
ISLM analysis
ISLM analysis of changes in goods and money markets
ISLM analysis of changes in the goods and money markets
Rate of interest
LM
r1
IS O
Y1 National income
ISLM analysis of changes in the goods and money markets LM
Rate of interest
A rise in injections
r2 r1
IS2 IS1 O
Y1
Y2
National income
ISLM analysis of changes in the goods and money markets LM1
LM2
Rate of interest
A rise in the money supply
r1 r3
IS O
Y1
Y3
National income
ISLM analysis of changes in the goods and money markets LM1
Rate of interest
A rise in both injections and money supply
LM2
r1
IS2 IS1 O
Y1 National income
Y4
ISLM analysis
Deriving an AD curve from an ISLM diagram
Rate of interest (r)
Deriving the AD curve from an ISLM diagram LM1
r1
a IS Y1
Price level (P)
National income (Y)
P1
a'
Y1
National income (Y)
Rate of interest (r)
Deriving the AD curve from an ISLM diagram LM2
r2
LM1
b a
r1
IS Y2
Y1
Price level (P)
National income (Y)
P2
b' a'
P1
AD Y2
Y1
National income (Y)
ISLM analysis
ISLM analysis of fiscal and monetary policy
ISLM analysis of fiscal and monetary policy
Rate of interest
LM
r1
IS O
Y1 National income
ISLM analysis of fiscal and monetary policy LM
Rate of interest
Expansionary fiscal policy
r2 r1
IS2 IS1 O
Y1
Y2
National income
ISLM analysis of fiscal and monetary policy LM1
LM2
Rate of interest
Expansionary monetary policy
r1 r3
IS O
Y1
Y3
National income
ISLM analysis of fiscal and monetary policy LM1
Rate of interest
Expansionary fiscal and monetary policy
LM2
r1
IS2 IS1 O
Y1 National income
Y4
ISLM analysis
Keynesian analysis of fiscal and monetary policy
Rate of interest
Keynesian analysis of fiscal and monetary policy
LM Expansionary fiscal policy
IS2 O
IS1 Y1
Y2
National income
Keynesian analysis of fiscal and monetary policy
Rate of interest
Expansionary monetary policy LM1 LM2
IS O
Y1 Y2 National income
ISLM analysis
Monetarist analysis of fiscal and monetary policy
Monetarist analysis of fiscal and monetary policy LM
Rate of interest
Expansionary fiscal policy
IS2 IS1
O
Y1Y2 National income
Monetarist analysis of fiscal and monetary policy LM1
LM2
Rate of interest
Expansionary monetary policy
IS
O
Y1
Y2
National income
ISLM analysis
Deriving the IS curve
Injections, Withdrawals
Goods market equilibrium: deriving the IS curve Assume that an interest rate of r1 gives investment of I1 and saving of S1 S1 (W1)
Rate of interest
O
r1
O
I1 (J1)
Injections, Withdrawals
Goods market equilibrium: deriving the IS curve Assume that an interest rate of r1 gives investment of I1 and saving of S1 S1 (W1)
Rate of interest
O
r1
O
I1 (J1) Y1
Injections, Withdrawals
Goods market equilibrium: deriving the IS curve Assume that an interest rate of r1 gives investment of I1 and saving of S1 S1 (W1)
Rate of interest
O
I1 (J1) Y1
r1
O
Y1
Injections, Withdrawals
Goods market equilibrium: deriving the IS curve Assume that an interest rate of r1 gives investment of I1 and saving of S1 S1 (W1)
Rate of interest
O
I1 (J1) Y1
a
r1
O
Y1
Injections, Withdrawals
Goods market equilibrium: deriving the IS curve Now assume that the interest rate falls to r2, giving investment of I2 and saving of S2 S1 (W1) S2 (W2)
Rate of interest
O
I2 (J2) I1 (J1) Y1
a
r1 r2
O
Y2
Y1
Injections, Withdrawals
Goods market equilibrium: deriving the IS curve Now assume that the interest rate falls to r2, giving investment of I2 and saving of S2 S1 (W1) S2 (W2)
Rate of interest
O
I2 (J2) I1 (J1) Y1
a
r1 r2
O
Y2
Y1
Injections, Withdrawals
Goods market equilibrium: deriving the IS curve Now assume that the interest rate falls to r2, giving investment of I2 and saving of S2 S1 (W1) S2 (W2)
Rate of interest
O
I2 (J2) I1 (J1) Y1
a
r1
b
r2
O
Y2
Y1
Injections, Withdrawals
Goods market equilibrium: deriving the IS curve Now assume that the interest rate falls to r2, giving investment of I2 and saving of S2 S1 (W1) S2 (W2)
Rate of interest
O
I2 (J2) I1 (J1) Y1
a
r1
b
r2
O
Y2
IS (J = W) Y1
ISLM analysis
Deriving the LM curve
Money market equilibrium: deriving the LM curve Assume that at a level of national income, Y1,
L' O
Rate of interest
Rate of interest
the demand for money is L'
O Money
Y1 National income
Money market equilibrium: deriving the LM curve Assume that at a level of national income, Y1, the demand for money is L'
L' O
Rate of interest
Rate of interest
MS
O Money
Y1 National income
Money market equilibrium: deriving the LM curve Assume that at a level of national income, Y1, the demand for money is L'
r1 L' O
Rate of interest
Rate of interest
MS
r1
O Money
Y1 National income
Money market equilibrium: deriving the LM curve Assume that at a level of national income, Y1, the demand for money is L'
r1 L' O
Rate of interest
Rate of interest
MS
r1
O Money
c
Y1 National income
Money market equilibrium: deriving the LM curve Now assume that at the higher level of national income, Y2, the demand for money rises to L"
r1
L" L'
O
Rate of interest
Rate of interest
MS
r1
O Money
c
Y2 Y1 National income
Money market equilibrium: deriving the LM curve Now assume that at the higher level of national income, Y2, the demand for money rises to L"
r2 r1
L" L'
O
Rate of interest
Rate of interest
MS
r2 r1
O Money
c
Y2 Y1 National income
Money market equilibrium: deriving the LM curve Now assume that at the higher level of national income, Y2, the demand for money rises to L"
r2 r1
L" L'
O
Rate of interest
Rate of interest
MS
r2 r1
O Money
d c
Y2 Y1 National income
Money market equilibrium: deriving the LM curve Now assume that at the higher level of national income, Y2, the demand for money rises to L" LM
r2 r1
L" L'
O
Rate of interest
Rate of interest
MS
r2 r1
O Money
d c
Y2 Y1 National income
ISLM analysis
Equilibrium
Equilibrium in both the goods and money markets
Rate of interest
LM
IS O National income
Equilibrium in both the goods and money markets LM
Rate of interest
Assume that national income is currently at a level of Y1
a
IS O
Y1 National income
Equilibrium in both the goods and money markets LM
Rate of interest
This gives a rate of interest of r1 (point a)
r1
a
IS O
Y1 National income
Equilibrium in both the goods and money markets LM
Rate of interest
But at r1, national income is below the goods market equilibrium level (Y2)
r1
a
b
IS O
Y1
Y2 National income
Equilibrium in both the goods and money markets LM
Rate of interest
But as income rises, so there will be a movement up the LM curve. The interest rate will rise, thereby reducing national income below Y2.
r1
a
b
IS O
Y1
Y2 National income
Equilibrium in both the goods and money markets
Rate of interest
LM
re
IS O
Ye National income
ISLM analysis
ISLM analysis of changes in goods and money markets
ISLM analysis of changes in the goods and money markets
Rate of interest
LM
r1
IS O
Y1 National income
ISLM analysis of changes in the goods and money markets LM
Rate of interest
A rise in injections
r2 r1
IS2 IS1 O
Y1
Y2
National income
ISLM analysis of changes in the goods and money markets LM1
LM2
Rate of interest
A rise in the money supply
r1 r3
IS O
Y1
Y3
National income
ISLM analysis of changes in the goods and money markets LM1
Rate of interest
A rise in both injections and money supply
LM2
r1
IS2 IS1 O
Y1 National income
Y4
ISLM analysis
Deriving an AD curve from an ISLM diagram
Rate of interest (r)
Deriving the AD curve from an ISLM diagram LM1
r1
a IS Y1
Price level (P)
National income (Y)
P1
a'
Y1
National income (Y)
Rate of interest (r)
Deriving the AD curve from an ISLM diagram LM2
r2
LM1
b a
r1
IS Y2
Y1
Price level (P)
National income (Y)
P2
b' a'
P1
AD Y2
Y1
National income (Y)
ISLM analysis
ISLM analysis of fiscal and monetary policy
ISLM analysis of fiscal and monetary policy
Rate of interest
LM
r1
IS O
Y1 National income
ISLM analysis of fiscal and monetary policy LM
Rate of interest
Expansionary fiscal policy
r2 r1
IS2 IS1 O
Y1
Y2
National income
ISLM analysis of fiscal and monetary policy LM1
LM2
Rate of interest
Expansionary monetary policy
r1 r3
IS O
Y1
Y3
National income
ISLM analysis of fiscal and monetary policy LM1
Rate of interest
Expansionary fiscal and monetary policy
LM2
r1
IS2 IS1 O
Y1 National income
Y4
ISLM analysis
Keynesian analysis of fiscal and monetary policy
Rate of interest
Keynesian analysis of fiscal and monetary policy
LM Expansionary fiscal policy
IS2 O
IS1 Y1
Y2
National income
Keynesian analysis of fiscal and monetary policy
Rate of interest
Expansionary monetary policy LM1 LM2
IS O
Y1 Y2 National income
ISLM analysis
Monetarist analysis of fiscal and monetary policy
Monetarist analysis of fiscal and monetary policy LM
Rate of interest
Expansionary fiscal policy
IS2 IS1
O
Y1Y2 National income
Monetarist analysis of fiscal and monetary policy LM1
LM2
Rate of interest
Expansionary monetary policy
IS
O
Y1
Y2
National income
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