Impact of is& lm curve in indian final


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Impact of is& lm curve in indian final

  1. 1. Impact Of IS& LM Curve in Indian Economy By- Sudarshan Kumar Patel
  2. 2. Brief Idea About IS & LM Curve The IS/LM model (Investment— Saving / Liquidity preference— Money supply) is a macroeconomic tool that demonstrates the relationship between interest rates and real output in the goods and services market and the money market.
  3. 3. Investment—Saving curve For the Investment—Saving curve, the independent variable is the interest rate and the dependent variable is the level of income (even though the interest rate is plotted vertically). The IS curve is drawn as downward-sloping with the interest rate (i) on the vertical axis and GDP (gross domestic product: Y) on the horizontal axis.
  4. 4. Liquidity Preference And Money Supply Curve For the Liquidity preference and Money supply curve, the independent variable is "income" and the dependent variable is "the interest rate." The LM curve shows the combinations of interest rates and levels of real income for which the money market is in equilibrium. It is an upward- sloping curve representing the role of finance & money
  5. 5. IS/LM Model-Impact of Fiscal Policy  A rise in Government investment spending, by increasing the demand for goods at the same interest rate, has the effect of pushing the IS curve to the right.  This in turn increases the aggregate demand and therefore the GDP.  However, interest rates have to increase so as to equilibrate between the loanable funds and liquidity preferences..
  6. 6. IS/LM Model-Impact of Monetary Policy  As the money supply is increased, the LM curve shifts outward or downward. This in turn will lower interest rates, spur investments and consumption, and raise national income.  However, in the long-run, prices/wages adjust to return the real money supply curve (and thereby the LM curve) backwards to its original position.  It is inferred that the long-run impact of any change in monetary policy is minimal
  7. 7. IS/LM Model-Impact of Great Recession  When the economy is operating way below its potential output frontier, large pool of labor unemployed, and aggregate demand heavily constrained by lack of purchasing power, an increase in money supply is not going to lead to inflationary pressures. Also, at the zero-bound, since cash and bonds become interchangeable, at the margins, money is just being held as a store of value, and changes in the money supply have no effect.
  8. 8. Effect of Fiscal & Monetary Policy Shift of IS Shift of LM Movement of Output Movement of Interest Increase In Taxes Left None Down Down Decrease in taxes Right None Up Up Increase in Spending Right None Up Up Decrease in spending Left None Down Down Increase in money None Down Up Down Decrease in money None Up Down Up
  9. 9. THANK YOU