1. ISLM analysis

2. ISLM analysis
Deriving the IS curve

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. ISLM analysis
Deriving the LM curve

12. 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

13. 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

14. Money market equilibrium: deriving the LM curveMS
Rate of interest
Rate of interest r1 r1 L' O O Y1
Money
National income

15. Money market equilibrium: deriving the LM curveMS
Rate of interest
Rate of interest c r1 r1 L' O O Y1
Money
National income

16. 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

17. 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

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

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

20. ISLM analysis
Equilibrium

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

22. Equilibrium in both the goods and money marketsLM
Rate of interest IS O
National income

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

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

25. Equilibrium in both the goods and money marketsLM
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

26. 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

27. Equilibrium in both the goods and money marketsLM
Rate of interest re IS O Ye
National income

28. ISLM analysis of fiscal and monetary policy

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

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

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

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

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

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

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

36. Keynesian analysis of fiscal and monetary policyLM
Rate of interest
IS1 O Y1
National income

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

38. Keynesian analysis of fiscal and monetary policyLM
Rate of interest
IS1 O Y1
National income

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

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

41. Monetarist analysis of fiscal and monetary policyLM
Rate of interest
IS1 O Y1
National income

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

43. Monetarist analysis of fiscal and monetary policyLM
Rate of interest
IS1 O Y1
National income

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