hi

1. 1
Relations, formulas, identities, theorems and
more in macroeconomics
By
Jesper Fredborg Huric-Larsen, Ph.D. in Economics
Karlstad University
December 2016

2. 2
Economic activity
Economic growth
∆𝑌𝑌
𝑌𝑌
% =
𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 𝐺𝐺𝐺𝐺𝐺𝐺 𝑎𝑎𝑎𝑎 𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡 𝑡𝑡 + 1 − 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 𝐺𝐺𝐺𝐺𝐺𝐺 𝑎𝑎𝑎𝑎 𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡 𝑡𝑡
𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 𝐺𝐺𝐺𝐺𝐺𝐺 𝑎𝑎𝑎𝑎 𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡 𝑡𝑡
∗ 100
The stable growth path (s.t.g.)
𝑠𝑠. 𝑡𝑡. 𝑔𝑔. =
1
𝑛𝑛
� 𝑌𝑌𝑡𝑡
𝑛𝑛
𝑡𝑡=1
𝑛𝑛: The total number of periods
GDP index number
𝐺𝐺𝐺𝐺𝐺𝐺 𝑖𝑖𝑖𝑖 𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦 𝑋𝑋
𝐺𝐺𝐺𝐺𝐺𝐺 𝑖𝑖𝑖𝑖 𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏 𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦
∗ 100
Inflation and interest rates
Inflation
𝜋𝜋 =
∆𝑝𝑝
𝑝𝑝
𝜋𝜋: The rate of inflation
The real rate of interest
𝑟𝑟 = 𝑖𝑖 − 𝜋𝜋
𝑟𝑟: The real interest rate
𝑖𝑖: The nominal interest rate
The labour market
The unemployment rate
𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 𝑜𝑜𝑜𝑜 𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢 =
𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢
𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓
∗ 100
Structural unemployment (The natural unemployment level)
𝑇𝑇ℎ𝑒𝑒 𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛 𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 = 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓 − 𝐴𝐴𝐴𝐴𝐴𝐴 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 𝑝𝑝𝑝𝑝𝑝𝑝𝑠𝑠𝑜𝑜𝑜𝑜𝑜𝑜

3. 3
Okun’s law
∆𝐺𝐺𝐺𝐺𝐺𝐺 = 𝑘𝑘 − 𝑐𝑐∆𝑢𝑢,
𝑘𝑘: The average annual growth rate of the economy under full employment, i.e. the growth rate at
the potential GDP
𝑐𝑐: a factor relating the change in unemployment to the change in GDP
𝑦𝑦̇ = 𝑘𝑘 − 𝑐𝑐𝑢𝑢̇
The Philips curve
𝜋𝜋 − 𝜋𝜋𝑒𝑒 = −𝑏𝑏(𝑢𝑢 − 𝑢𝑢𝑛𝑛) + 𝑣𝑣 ⇒
𝜋𝜋: The going rate of inflation
𝜋𝜋𝑒𝑒: The expected rate of inflation or the average inflation given the state of the economy
𝑢𝑢: The going unemployment rate
𝑢𝑢𝑛𝑛: The natural unemployment level
𝑏𝑏: A positive parameter linking the change in unemployment to the rate of inflation
𝑣𝑣: A term describing the maximum amount of inflation in an economy with full employment of
resources
Households
The marginal propensity to consume of income
𝑏𝑏 =
𝑐𝑐ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑖𝑖𝑛𝑛 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐
𝑐𝑐ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑖𝑖𝑖𝑖 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖
=
∆𝐶𝐶
∆𝑌𝑌
Money markets
The credit multiplier
𝑘𝑘𝑐𝑐 =
1
𝑐𝑐 + 𝑟𝑟(1 − 𝑐𝑐)
𝑘𝑘𝑐𝑐: The credit multiplier
c: cash fraction (%), is the share of the amount retained as cash by banks

4. 4
r: reserve ratio (%), is the share of the amount which is required by banks to retain as a reserve in
case of financial difficulties or stress
The demand for money
�
𝑀𝑀
𝑃𝑃
�
𝑑𝑑
= 𝐿𝐿 = 𝑘𝑘𝑘𝑘 − ℎ𝑟𝑟
𝑟𝑟: The real interest rate
𝑌𝑌: The national income
𝑘𝑘: The cash requirement
ℎ: Interest sensitivity to changes in the price of money
The supply of money
�
𝑀𝑀
𝑃𝑃
�
𝑠𝑠
Equilibrium in the money market
�
𝑀𝑀
𝑃𝑃
�
𝑑𝑑
= �
𝑀𝑀
𝑃𝑃
�
𝑠𝑠
Capital markets
The investment function
𝐼𝐼(𝑟𝑟) = 𝐼𝐼0 − 𝑏𝑏𝑏𝑏
𝐼𝐼(𝑟𝑟): The investment function
𝐼𝐼0: Autonomous investments
𝑏𝑏: The interest rate sensitivity of investments
𝑟𝑟: The real rate of interest
The financial market
Two- and Three-sector economy:
𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚 ≡ 𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚 𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚 + 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚
Four-sector economy:

5. 5
𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚 ≡ 𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚 𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚 + 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚 + 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚
Equilibrium in the economy
Two-sector economy
𝑌𝑌 = 𝐶𝐶 + 𝐼𝐼
𝐼𝐼 = 𝑆𝑆
𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 = 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼
𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿: S
𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼: I
Three-sector economy
𝑌𝑌 = 𝐶𝐶 + 𝐼𝐼 + 𝐺𝐺
𝐼𝐼 = 𝑆𝑆
𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 = 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼
𝑇𝑇 = 𝐺𝐺
𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿: T and S
𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼: I and G
Four-sector economy
𝑌𝑌 = 𝐶𝐶 + 𝐼𝐼 + 𝐺𝐺 + 𝑁𝑁𝑁𝑁
𝐼𝐼 = 𝑆𝑆
𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 = 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼
𝑖𝑖𝑑𝑑 = 𝑖𝑖𝑓𝑓, 𝑤𝑤𝑤𝑤𝑤𝑤ℎ 𝑖𝑖 𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏 𝑡𝑡ℎ𝑒𝑒 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑 𝑎𝑎𝑎𝑎𝑎𝑎 𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓
𝑒𝑒 =
𝑝𝑝𝑑𝑑
𝑝𝑝𝑓𝑓
, 𝑤𝑤𝑤𝑤𝑤𝑤ℎ 𝑒𝑒 𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏 𝑡𝑡ℎ𝑒𝑒 𝑒𝑒𝑒𝑒𝑒𝑒ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 𝑎𝑎𝑎𝑎𝑎𝑎 𝑝𝑝 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑 𝑎𝑎𝑎𝑎𝑎𝑎 𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓
𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿: S, T, and IM
𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼: I, G, and X

6. 6
The expenditure multiplier
The fiscal multiplier
∆𝑌𝑌
∆𝐺𝐺
≡ 𝑘𝑘𝑒𝑒
𝑘𝑘𝑒𝑒: The expenditure multiplier, also called the fiscal multiplier
Two-sector economy
𝑘𝑘𝑒𝑒 =
1
1 − 𝑐𝑐
𝑐𝑐: The marginal propensity to consume
Three-sector economy
𝑘𝑘𝑒𝑒 =
1
1 − 𝑐𝑐(1 − 𝑡𝑡)
This version is used whenever the consumption function is defined as, 𝐶𝐶 = 𝐶𝐶0 + 𝑐𝑐(1 − 𝑡𝑡)𝑌𝑌.
𝑘𝑘𝑒𝑒 =
1
1 − 𝑐𝑐
This version is used whenever the consumption function is defined as, 𝐶𝐶 = 𝐶𝐶0 + 𝑐𝑐(𝑌𝑌 − 𝑇𝑇).
Four-sector economy
𝑘𝑘𝑒𝑒 =
1
1 − 𝑐𝑐(1 − 𝑡𝑡) + 𝑖𝑖𝑖𝑖
𝑖𝑖𝑖𝑖: The marginal propensity to import
Multiplier effects
The initial effect of a change in expenditures
∆𝑌𝑌 = ∆𝐺𝐺
∆𝑌𝑌: The change in income

7. 7
∆𝐺𝐺: The change in expenditures exemplified by a change in government spending
Round effects(R.e.)
∆𝑌𝑌𝑡𝑡 = ∆𝐺𝐺(𝑘𝑘𝑒𝑒 − 1)𝑡𝑡
∆𝑌𝑌𝑡𝑡: The change in national income in round t
𝑡𝑡: Time or round under consideration
∆𝐺𝐺: The change in expenditures exemplified by a change in government spending
𝑘𝑘𝑒𝑒: The expenditure multiplier
The total effect
� ∆𝑌𝑌𝑡𝑡
𝑛𝑛
𝑡𝑡=0
= � ∆𝐺𝐺(𝑘𝑘𝑒𝑒 − 1)𝑡𝑡
𝑛𝑛
𝑡𝑡=0
=
∆𝐺𝐺
2 − 𝑘𝑘𝑒𝑒
𝑛𝑛: The number of rounds in the multiplier runs
The round in which we expect to observe an insignificant effect on national income
𝑡𝑡 =
ln �
𝑖𝑖. 𝑐𝑐.
∆𝐺𝐺
�
ln(𝑘𝑘𝑒𝑒 − 1)
𝑖𝑖. 𝑐𝑐.: An insignificant condition chosen by the observer
Competitiveness
A country’s competitiveness I
𝑝𝑝𝑑𝑑
𝑒𝑒𝑝𝑝𝑓𝑓
A country’s competitiveness II
𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 =
𝐺𝐺𝐺𝐺𝐺𝐺
𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 ∗ 𝐴𝐴𝐶𝐶𝐿𝐿
𝐴𝐴𝐶𝐶𝐿𝐿: The average labour cost

8. 8
Balance of payments
The balance of payments (BP)
𝐵𝐵𝐵𝐵 = 𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏 𝑜𝑜𝑜𝑜 𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡 + 𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏 𝑜𝑜𝑜𝑜 𝑔𝑔𝑔𝑔𝑔𝑔𝑑𝑑𝑠𝑠 𝑎𝑎𝑎𝑎𝑎𝑎 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 + 𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏 𝑜𝑜𝑜𝑜 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎
+ 𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏 𝑜𝑜𝑜𝑜 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 + 𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡
𝐵𝐵𝐵𝐵 = 𝑁𝑁𝑁𝑁 = 𝑋𝑋 − 𝐼𝐼𝐼𝐼
𝑋𝑋 = 𝑋𝑋(𝑒𝑒)
𝐼𝐼𝐼𝐼 = 𝐼𝐼𝑀𝑀0 + 𝑖𝑖𝑖𝑖𝑖𝑖 𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝐼𝐼𝐼𝐼(𝑌𝑌, 𝑒𝑒)
𝑖𝑖𝑖𝑖: The marginal propensity to import, 𝑖𝑖𝑖𝑖 =
∆𝐼𝐼𝐼𝐼
∆𝑌𝑌
Exchange rates
The value of foreign currency in local currency
𝑒𝑒 =
𝑆𝑆𝑆𝑆𝑆𝑆
𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒
The value of local currency in foreign currency
𝑒𝑒 =
𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒
𝑆𝑆𝑆𝑆𝑆𝑆
A percentage change in the exchange rate
∆𝑒𝑒
𝑒𝑒
=
∆𝑆𝑆𝑆𝑆𝑆𝑆
𝑆𝑆𝑆𝑆𝑆𝑆
−
∆𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒
𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒
= 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 𝑐𝑐ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑖𝑖𝑖𝑖 𝑆𝑆𝑆𝑆𝑆𝑆 − 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 𝑐𝑐ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑖𝑖𝑖𝑖 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒
The interest parity theorem
𝑖𝑖𝑑𝑑 − 𝑖𝑖𝑓𝑓 = 𝑒𝑒𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓 − 𝑒𝑒𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠
𝑖𝑖𝑑𝑑: The domestic interest rate
𝑖𝑖𝑓𝑓: The foreign or international interest rate
𝑒𝑒𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓: The exchange rate in the forward market for currency
𝑒𝑒𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠: The exchange rate in the spot market for currency

9. 9
The purchasing power parity
𝑒𝑒 =
𝑝𝑝𝑑𝑑
𝑝𝑝𝑓𝑓
𝑒𝑒: The exchange rate
𝑝𝑝𝑑𝑑: Domestic prices
𝑝𝑝𝑓𝑓: foreign prices
LR adjustments of an exchange rate change
∆𝑒𝑒
𝑒𝑒
=
∆𝑝𝑝𝑑𝑑
𝑝𝑝𝑑𝑑
−
∆𝑝𝑝𝑓𝑓
𝑝𝑝𝑓𝑓
⇒ 𝑒𝑒̇ = 𝜋𝜋𝑑𝑑 − 𝜋𝜋𝑓𝑓
𝑒𝑒̇: The change in the exchange rate
𝜋𝜋𝑑𝑑: Domestic rate of inflation
𝜋𝜋𝑓𝑓: The foreign rate of inflation
The IS-curve
𝑟𝑟 =
𝐶𝐶0 + 𝐼𝐼0 + 𝐺𝐺
𝑏𝑏
−
𝑌𝑌
𝑘𝑘𝑒𝑒𝑏𝑏
𝑟𝑟: The real rate of interest
𝑌𝑌: The national income
𝐶𝐶0: Autonomous consumption
𝐼𝐼0: Autonomous investments
𝐺𝐺: Government spending
𝑏𝑏: The slope of the investment function, the interest rate sensitivity of investments
𝑘𝑘𝑒𝑒 =
1
1−𝑐𝑐
: The expense multiplier of the economy with 𝑐𝑐 being the marginal propensity to
consume

10. 10
𝑟𝑟 =
𝑘𝑘
ℎ
𝑌𝑌 −
𝑀𝑀
�
ℎ
The LM-curve
𝑟𝑟: The real interest rate 𝐼𝐼𝐼𝐼 − 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 = 𝐿𝐿𝐿𝐿 − 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐
𝑌𝑌: The national income
𝑘𝑘: The cash requirement
ℎ: Interest sensitivity to changes in the price of money
𝑀𝑀
� : The money supply
Equilibrium in the IS-LM-model
The income and real rate of interest for which,