2. The Goods and The Money
Market
Equilibrium According to Keynes, Equilibrium of the
goods market is achieved when planned
saving is equal to planned investment.
S = I
OR
Y = C + I
Equilibrium of the money market requires
equality between the supply of and the
demand for money.
Ms = Md
3. Equilibrium in the Goods
Market
In developing the IS model, investment is
considered as a function of rate of interest
, consumption and saving as functions of
income.
Investment Function : I = I(r)
Consumption Function : C = C(Y)
Saving Function : S = S(Y)
Equilibrium in the goods market is
achieved when : -
S(Y) = I(r)
However, this relationship may be shown
graphically as follows
4. IS Curve
Re-translation of Simple
Keynesian model at equilibrium
(Investment = Saving).
A plot of equilibrium output for
various interest rates within the
market for goods and services.
5. Determining Output
Two characteristics of ZZ are:
Because it’s assumed that the
consumption and investment
Relations are linear, ZZ is,
in general, a curve
rather than a line.
ZZ is drawn flatter than a 45-
degree line because it’s
assumed that an increase in
output leads to a less than one
for-one increase in demand.
6. Deriving the IS Curve
Deriving the IS Curve
(a) An increase in the interest
rate decreases the demand
for goods at any level of
output, leading to a decrease
in the equilibrium level of
output.
(b) Equilibrium in the goods
market implies that an
increase in the interest rate
leads to a decrease in
output.
7. Properties of IS Curve
Increase/Decrease in autonomous
expenditure will shift the IS curve
Rightward/Leftward.
There is an inverse relationship between
income(Y) and rate of interest(ROI)
The steepness or flatness of the IS curve
determine its elasticity
-- Steep IS curve: inelastic.
-- Flat IS curve: elastic.
8. Equilibrium in the Money
Market
Money Market Equilibrium is
achieved when the supply of
money and demand for money
are equal.
Ms = Md
9. LM Curve
Depicts equilibrium in the Money market
(L = M).
A plot of the equilibrium interest rate for
various levels of output or income,
within the money market for a given
level of the nominal money supply.
10. Deriving the LM Curve
An increase in
income leads, at a
given interest rate,
to an increase in
the demand for
money. Given the
money supply, this
increase in the
demand for money
leads to an
increase in the
equilibrium interest
rate.
Equilibrium in the
financial markets
implies that an
increase in income
leads to an
increase in the
interest rate. The
LM curve is
therefore upward
sloping.
12. Properties of LM Curve
Upward sloping,
Y L i*
Increase/Decrease in the real money supply
shift the LM curve Rightward/Leftward.
The steepness or flatness of the LM curve
describes the elasticity or responsiveness of
money demand (L) to the nominal interest
rate.
-- Steep LM curve: inelastic.
-- Flat LM curve: elastic.
(L=speculative demand for money)
13. Conclusion
IS Curve represents the equilibrium
of the goods market.
LM Curve represents the
equilibrium of the money market.
The point of intersection of the two
curves is the point of equilibrium of
both the markets simultaneously.
14. A Presentation By : -
PRATEEK
BANSAL
VIVEK RATHI
DEBANKITA PAUL
