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ISLM analysis
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ISLM analysis Deriving the IS curve
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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
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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
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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
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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
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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
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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
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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
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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
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ISLM analysis Deriving the LM curve
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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
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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
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Money market equilibrium: deriving the LM curve
MS Rate of interest Rate of interest r1 r1 L' O O Y1 Money National income
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Money market equilibrium: deriving the LM curve
MS Rate of interest Rate of interest c r1 r1 L' O O Y1 Money National income
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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
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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
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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
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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
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ISLM analysis Equilibrium
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Equilibrium in both the goods and money markets
Rate of interest IS O National income
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Equilibrium in both the goods and money markets
LM Rate of interest IS O National income
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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
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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
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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
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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
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Equilibrium in both the goods and money markets
LM Rate of interest re IS O Ye National income
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ISLM analysis of fiscal and monetary policy
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ISLM analysis of fiscal and monetary policy
Rate of interest r1 IS O Y1 National income
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ISLM analysis of fiscal and monetary policy
Expansionary fiscal policy Rate of interest r2 r1 IS2 IS1 O Y1 Y2 National income
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ISLM analysis of fiscal and monetary policy
Rate of interest r1 IS O Y1 National income
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ISLM analysis of fiscal and monetary policy
Expansionary monetary policy Rate of interest r1 r3 IS O Y1 Y3 National income
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ISLM analysis of fiscal and monetary policy
Rate of interest r1 IS O Y1 National income
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ISLM analysis of fiscal and monetary policy
Expansionary fiscal and monetary policy Rate of interest r1 IS2 IS1 O Y1 Y4 National income
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Keynesian analysis of fiscal and monetary policy
ISLM analysis Keynesian analysis of fiscal and monetary policy
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Keynesian analysis of fiscal and monetary policy
LM Rate of interest IS1 O Y1 National income
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Keynesian analysis of fiscal and monetary policy
LM Expansionary fiscal policy Rate of interest IS2 IS1 O Y1 Y2 National income
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Keynesian analysis of fiscal and monetary policy
LM Rate of interest IS1 O Y1 National income
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Keynesian analysis of fiscal and monetary policy
Expansionary monetary policy LM1 Rate of interest LM2 IS O Y1 Y2 National income
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Monetarist analysis of
ISLM analysis Monetarist analysis of fiscal and monetary policy
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Monetarist analysis of fiscal and monetary policy
LM Rate of interest IS1 O Y1 National income
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Monetarist analysis of fiscal and monetary policy
LM Expansionary fiscal policy Rate of interest IS2 IS1 O Y1 Y2 National income
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Monetarist analysis of fiscal and monetary policy
LM Rate of interest IS1 O Y1 National income
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Monetarist analysis of fiscal and monetary policy
LM1 LM2 Expansionary monetary policy Rate of interest IS O Y1 Y2 National income
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