Chapter 20 The ISLM Model.

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Presentation transcript:

Chapter 20 The ISLM Model

Determination of Aggregate Output Copyright © 2007 Pearson Addison-Wesley. All rights reserved.

Consumption Expenditure and the Consumption Function Copyright © 2007 Pearson Addison-Wesley. All rights reserved.

Copyright © 2007 Pearson Addison-Wesley. All rights reserved.

Copyright © 2007 Pearson Addison-Wesley. All rights reserved.

Investment Spending Fixed investment—always planned Inventory investment—can be unplanned Planned investment spending Interest rates Expectations Copyright © 2007 Pearson Addison-Wesley. All rights reserved.

Copyright © 2007 Pearson Addison-Wesley. All rights reserved.

Expenditure Multiplier Copyright © 2007 Pearson Addison-Wesley. All rights reserved.

Copyright © 2007 Pearson Addison-Wesley. All rights reserved.

Copyright © 2007 Pearson Addison-Wesley. All rights reserved.

Changes in Autonomous Spending Copyright © 2007 Pearson Addison-Wesley. All rights reserved.

Government’s Role Copyright © 2007 Pearson Addison-Wesley. All rights reserved.

Copyright © 2007 Pearson Addison-Wesley. All rights reserved.

Role of International Trade Copyright © 2007 Pearson Addison-Wesley. All rights reserved.

Copyright © 2007 Pearson Addison-Wesley. All rights reserved.

Copyright © 2007 Pearson Addison-Wesley. All rights reserved.

The ISLM Model Includes money and interest rates in the Keynesian framework Examines an equilibrium where aggregate output equals aggregate demand Assumes fixed price level where nominal and real quantities are the same IS curve is the relationship between equilibrium aggregate output and the interest rate LM curve is the combinations of interest rates and aggregate output for which MD = MS Copyright © 2007 Pearson Addison-Wesley. All rights reserved.

Equilibrium in the Goods Market: The IS Curve Interest rates and planned investment spending Negative relationship Interest rates and net exports The points at which the total quantity of goods produced equals the total quantity of goods demanded Output tends to move toward points on the curve that satisfies the goods market equilibrium Copyright © 2007 Pearson Addison-Wesley. All rights reserved.

Copyright © 2007 Pearson Addison-Wesley. All rights reserved.

Copyright © 2007 Pearson Addison-Wesley. All rights reserved.

Copyright © 2007 Pearson Addison-Wesley. All rights reserved.

Equilibrium in the Market for Money: The LM Curve Demand for money called liquidity preference Md/P depends on income (Y) and interest rates (i) Positively related to income Raises the level of transactions Increases wealth Negatively related to interest rates Copyright © 2007 Pearson Addison-Wesley. All rights reserved.

Equilibrium in the Market for Money: The LM Curve (cont’d) Connects points that satisfy the equilibrium condition that MD = MS For each level of aggregate output, the LM curve tells us what the interest rate must be for equilibrium to occur The economy tends to move toward points on the LM curve Copyright © 2007 Pearson Addison-Wesley. All rights reserved.

Copyright © 2007 Pearson Addison-Wesley. All rights reserved.

Copyright © 2007 Pearson Addison-Wesley. All rights reserved.