Revision
Monday 2 December 2024 10:40
Chapter / topic 3 most important
Argue that gov debt decentralises
the efficient steady state
Effectively passing consumption
from the young to old, allows
young to save via gov debt which
is paid back when the young are
old, allows the passing of the
chocolate back to the left
ES22013_Pr
ac,se…
IS - LM Model
KEY TAKEAWAYS
• The IS-LM model describes how aggregate markets for real goods and financial
markets interact to balance the rate of interest and total output in the
macroeconomy.
• IS-LM stands for “investment-saving” (IS) and “liquidity preference-money
supply” (LM).
• IS-LM can be used to describe how changes in market preferences alter the
equilibrium levels of gross domestic product (GDP) and market interest rates.
IS =MONEY SUPPLY
LM = MONEY DEMAND
The IS Curve
The IS curve depicts the set of all levels of interest rates and output (GDP) at which
total investment (I) equals total saving (S). At lower interest rates, investment is
higher, which translates into more total output (GDP), so the IS curve slopes
downward and to the right.
The LM Curve
The LM curve depicts the set of all levels of income (GDP) and interest rates at which
money supply equals money (liquidity) demand. The LM curve slopes upward
because higher levels of income (GDP) induce increased demand to hold money
balances for transactions, which requires a higher interest rate to keep money supply
and liquidity demand in equilibrium.
Monday 2 December 2024 10:40
Chapter / topic 3 most important
Argue that gov debt decentralises
the efficient steady state
Effectively passing consumption
from the young to old, allows
young to save via gov debt which
is paid back when the young are
old, allows the passing of the
chocolate back to the left
ES22013_Pr
ac,se…
IS - LM Model
KEY TAKEAWAYS
• The IS-LM model describes how aggregate markets for real goods and financial
markets interact to balance the rate of interest and total output in the
macroeconomy.
• IS-LM stands for “investment-saving” (IS) and “liquidity preference-money
supply” (LM).
• IS-LM can be used to describe how changes in market preferences alter the
equilibrium levels of gross domestic product (GDP) and market interest rates.
IS =MONEY SUPPLY
LM = MONEY DEMAND
The IS Curve
The IS curve depicts the set of all levels of interest rates and output (GDP) at which
total investment (I) equals total saving (S). At lower interest rates, investment is
higher, which translates into more total output (GDP), so the IS curve slopes
downward and to the right.
The LM Curve
The LM curve depicts the set of all levels of income (GDP) and interest rates at which
money supply equals money (liquidity) demand. The LM curve slopes upward
because higher levels of income (GDP) induce increased demand to hold money
balances for transactions, which requires a higher interest rate to keep money supply
and liquidity demand in equilibrium.
