IS-LM MODEL ANALYSIS IN BRIEF. source: The Economics of Money, Banking, and Financial Markets Edition: 7th Book author name: Frederic S. Mishkin

1. IS-LM MODEL
The Economics of Money, Banking, and Financial Markets7th
Frederic S. Mishkin

2. J
what is IS-LM Model?
The Economics of Money, Banking, and
Financial Markets7th
• Economics Crystal ball.
• Tool for deeper understanding
Government policy & GDP
movements.
• John Hicks 1937.

3. The Economics of Money, Banking, and
Financial Markets7th
Determination of Aggregate Output.
› Keynesian recognitions:
› Y=Yad ƒ(C+I+G+NX).
› Keynesian analysis simplification.
- Fixed price level.
- Planned investment (known value).
- Gradually assessment addition.

4. The Economics of Money, Banking, and
Financial Markets7th
Determination of Aggregate Output.
› Equilibrium and Keynesian cross diagram.

5. The Economics of Money, Banking, and
Financial Markets7th
Determination of Aggregate Output.
›Do not forget:
- Up ward slopping (MPC).
- Multiplier affect.
- What if NX added (100$).

6. The Economics of Money, Banking, and
Financial Markets7th
 Equilibrium in good market (driving IS curve).
› interest rate & planned investment.
- Fund deficit.
- Fund surplus.
› Interest rate & net export.
› Interest rate & aggregate out-put.

7. The Economics of Money, Banking, and
Financial Markets7th
 Equilibrium in good market (driving IS curve).

8. The Economics of Money, Banking, and
Financial Markets7th
 Equilibrium in good market (driving IS curve).

9. The Economics of Money, Banking, and
Financial Markets7th
What is IS curve tell us?
› Good market clearance.
› Equilibrium level of out-put, given interest rate.
- Good market excess supply.
- Good market excess demand.
› Note: no unique out-put level.

10. The Economics of Money, Banking, and
Financial Markets7th
 Equilibrium in money market (driving LM curve).
› Equilibrium condition:
M.D = M.S
› Main building blocks:
- Liquidity preferences theory.
Money demand determents:
• Interest rate.
• income.

11. The Economics of Money, Banking, and
Financial Markets7th
 Equilibrium in money market (driving LM curve).

12. The Economics of Money, Banking, and
Financial Markets7th
What is LM curve tell us?
› Money market clearance.
› Equilibrium level of interest rate, given level of
out- put.
- Excess money supply.
- Excess money demand.
› Note: no unique interest rate.

13. The Economics of Money, Banking, and
Financial Markets7th
IS-LM determination aggregate out-put and
interest rate.
› Equilibrium in both
markets(IS-LM curves
intersection)
› Market forces to ward
General Equilibrium.

14. The Economics of Money, Banking, and
Financial Markets7th
 Factors causes IS curve to shift.
› Change in:
- Autonomous consumer expenditure.
- Investment spending (unrelated to interest rate).
- Net export (unrelated to interest rate).
- Government spending or taxes.

15. The Economics of Money, Banking, and
Financial Markets7th
 Factors causes IS curve to shift.

16. The Economics of Money, Banking, and
Financial Markets7th
 Factors causes IM curve to shift.
› Change in Money supply.

17. The Economics of Money, Banking, and
Financial Markets7th
 Factors causes IM curve to shift.
› Change in Autonomous Money demand.

18. The Economics of Money, Banking, and
Financial Markets7th
Change in equilibrium level, interest rate and
aggregate out-put.
› Response to change in fiscal policy.
› Response to change in monetary policy.

19. The Economics of Money, Banking, and
Financial Markets7th
 Monetary policy VS Fiscal policy
› Solving high unemployment:
- Using fiscal policy.
- Using monetary policy.
› Conclusion.

20. The Economics of Money, Banking, and
Financial Markets7th
 Monetary policy VS Fiscal policy
› Stable IS curve.
- Targeting interest rate.
- Targeting money supply.

21. The Economics of Money, Banking, and
Financial Markets7th
 Monetary policy VS Fiscal policy
› Stable LM curve.
- Interest rate targeting.
- Money supply targeting.

22. The Economics of Money, Banking, and
Financial Markets7th
IS-LM model in long run.
› Response to money supply.
› Response to government spending.

23. The Economics of Money, Banking, and
Financial Markets7th
Driving aggregate demand curve.

24. The Economics of Money, Banking, and
Financial Markets7th
 Factors shift Aggregate demand curve.
› Shift in IS curve (is curve factors).

25. The Economics of Money, Banking, and
Financial Markets7th
 Factors shift Aggregate demand curve.
› Shifts in LM curve.

26. The Economics of Money, Banking, and
Financial Markets7th
Mathematics on board
- Multiplayer affect.
- Solving IS-LM equations.