So far we understood how the goods and money market work in a partial equilibrium set up. Now we move towards a general equilibrium understanding of these.

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Presentation transcript:

So far we understood how the goods and money market work in a partial equilibrium set up. Now we move towards a general equilibrium understanding of these markets…

Investment (I) and the interest rate (r) Goods and money market equilibrium - Goods market - Money market - Links between goods and money markets The IS-LM model - IS curve - LM curve - IS-LM diagram (determining the aggregate output (Y) and interest rate (r) of equilibrium.

Investment (I) and the interest rate (r) Before… I = I which is exogenously given Now… I = I ( r ) -

Goods and money market equilibrium - Goods market The market in which goods and services are exchanged and in which the equilibrium level of aggregate output (Y) is determined. - Money market The market in which financial instruments are exchanged and in which the equilibrium level of the interest rate (r) is determined. - Links between goods and money markets

The IS-LM model The IS-LM model is a graphical framework developed by John Hicks. It is a very useful way to derive the aggregate output and interest rate in the goods and money market. - IS curve - LM curve - IS-LM diagram (determining the Y and r of equilibrium)