ISLM analysis

ISLM analysis Deriving the IS curve

Goods market equilibrium: deriving the IS curve Assume that an interest rate of r1 gives investment of I1 and saving of S1 Injections, Withdrawals S1 (W1) I1 (J1) O r1 Rate of interest O

Goods market equilibrium: deriving the IS curve Assume that an interest rate of r1 gives investment of I1 and saving of S1 Injections, Withdrawals S1 (W1) I1 (J1) O Y1 r1 Rate of interest O

Goods market equilibrium: deriving the IS curve Assume that an interest rate of r1 gives investment of I1 and saving of S1 Injections, Withdrawals S1 (W1) I1 (J1) O Y1 r1 Rate of interest O Y1

Goods market equilibrium: deriving the IS curve Assume that an interest rate of r1 gives investment of I1 and saving of S1 Injections, Withdrawals S1 (W1) I1 (J1) O Y1 a r1 Rate of interest O Y1

Goods market equilibrium: deriving the IS curve Now assume that the interest rate falls to r2, giving investment of I2 and saving of S2 Injections, Withdrawals S1 (W1) S2 (W2) I2 (J2) I1 (J1) O Y1 Y2 a r1 Rate of interest r2 O Y1

Goods market equilibrium: deriving the IS curve Now assume that the interest rate falls to r2, giving investment of I2 and saving of S2 Injections, Withdrawals S1 (W1) S2 (W2) I2 (J2) I1 (J1) O Y1 Y2 a r1 Rate of interest r2 O Y1

Goods market equilibrium: deriving the IS curve Now assume that the interest rate falls to r2, giving investment of I2 and saving of S2 Injections, Withdrawals S1 (W1) S2 (W2) I2 (J2) I1 (J1) O Y1 Y2 a r1 Rate of interest b r2 O Y1

Goods market equilibrium: deriving the IS curve Now assume that the interest rate falls to r2, giving investment of I2 and saving of S2 Injections, Withdrawals S1 (W1) S2 (W2) I2 (J2) I1 (J1) O Y1 Y2 a r1 Rate of interest b r2 IS (J = W) O Y1

ISLM analysis Deriving the LM curve

Money market equilibrium: deriving the LM curve Assume that at a level of national income, Y1, the demand for money is L' Rate of interest Rate of interest L' O O Y1 Money National income

Money market equilibrium: deriving the LM curve Assume that at a level of national income, Y1, the demand for money is L' MS Rate of interest Rate of interest L' O O Y1 Money National income

Money market equilibrium: deriving the LM curve MS Rate of interest Rate of interest r1 r1 L' O O Y1 Money National income

Money market equilibrium: deriving the LM curve MS Rate of interest Rate of interest c r1 r1 L' O O Y1 Money 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" MS Rate of interest Rate of interest c r1 r1 L" L' O O Y1 Y2 Money 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" MS r2 r2 Rate of interest Rate of interest c r1 r1 L" L' O O Y1 Y2 Money National income

Money market equilibrium: deriving the LM curve MS d r2 r2 Rate of interest Rate of interest c r1 r1 L" L' O O Y1 Y2 Money National income

Money market equilibrium: deriving the LM curve MS LM d r2 r2 Rate of interest Rate of interest c r1 r1 L" L' O O Y1 Y2 Money National income

ISLM analysis Equilibrium

Equilibrium in both the goods and money markets Rate of interest IS O National income

Equilibrium in both the goods and money markets LM Rate of interest IS O National income

Equilibrium in both the goods and money markets LM Assume that national income is currently at a level of Y1 Rate of interest a IS O Y1 National income

Equilibrium in both the goods and money markets LM This gives a rate of interest of r1 (point a) Rate of interest a r1 IS O Y1 National income

Equilibrium in both the goods and money markets LM But at r1, national income is below the goods market equilibrium level (Y2) Rate of interest a b r1 IS O Y1 Y2 National income

Equilibrium in both the goods and money markets 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. LM Rate of interest a b r1 IS O Y1 Y2 National income

Equilibrium in both the goods and money markets LM Rate of interest re IS O Ye National income

ISLM analysis of fiscal and monetary policy

ISLM analysis of fiscal and monetary policy Rate of interest r1 IS O Y1 National income

ISLM analysis of fiscal and monetary policy Expansionary fiscal policy Rate of interest r2 r1 IS2 IS1 O Y1 Y2 National income

ISLM analysis of fiscal and monetary policy Rate of interest r1 IS O Y1 National income

ISLM analysis of fiscal and monetary policy Expansionary monetary policy Rate of interest r1 r3 IS O Y1 Y3 National income

ISLM analysis of fiscal and monetary policy Rate of interest r1 IS O Y1 National income

ISLM analysis of fiscal and monetary policy Expansionary fiscal and monetary policy Rate of interest r1 IS2 IS1 O Y1 Y4 National income

Keynesian analysis of fiscal and monetary policy ISLM analysis Keynesian analysis of fiscal and monetary policy

Keynesian analysis of fiscal and monetary policy LM Rate of interest IS1 O Y1 National income

Keynesian analysis of fiscal and monetary policy LM Expansionary fiscal policy Rate of interest IS2 IS1 O Y1 Y2 National income

Keynesian analysis of fiscal and monetary policy LM Rate of interest IS1 O Y1 National income

Keynesian analysis of fiscal and monetary policy Expansionary monetary policy LM1 Rate of interest LM2 IS O Y1 Y2 National income

Monetarist analysis of ISLM analysis Monetarist analysis of fiscal and monetary policy

Monetarist analysis of fiscal and monetary policy LM Rate of interest IS1 O Y1 National income

Monetarist analysis of fiscal and monetary policy LM Expansionary fiscal policy Rate of interest IS2 IS1 O Y1 Y2 National income

Monetarist analysis of fiscal and monetary policy LM Rate of interest IS1 O Y1 National income

Monetarist analysis of fiscal and monetary policy LM1 LM2 Expansionary monetary policy Rate of interest IS O Y1 Y2 National income