1. Chapter 20
The ISLM Model

2. Determination of Aggregate Output
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3. Consumption Expenditure and the Consumption Function
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6. Investment Spending Fixed investment—always planned
Inventory investment—can be unplanned
Planned investment spending
Interest rates
Expectations
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8. Expenditure Multiplier
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11. Changes in Autonomous Spending
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12. Government’s Role
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14. Role of International Trade
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17. 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
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18. 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
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22. 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
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23. 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
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