Keynesian is LMd

7/27/2019 Keynesian is LMd

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Keynesian IS-LM

DEEPAKS.Y.B.M.S.


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IS curve

IS curve is a set of points,

showing various combinations

of income generated in the

economy and interest rate atwhich the goods market is in

equilibrium.

Points lying outside the IS curve

means the goods market

imbalances of the economy


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To derive the IS curve graphically,

you need the following relations(graphs):

Condition 1

First function long-term savings

The IS CURVE-MARKET GOODS is shown GRAPHICALLY

S

Y

45

S(Y)

Condition 2balance on the marketgoods

S

I

45

Condition 3.dependency investment

from interest rate

r

I

I(r)


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S

Y

45

S(Y)

S

I

45

r

I

I(r)

r

Y

IS


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Equation 1:- Aggregate DemandAD = C + I + G+ NX(Y)

Where AD is Aggregate Demand,

C is Consumers Expenditure or

Consumption,I is the level of Investment ,

G is the level of Government

Expenditure,

and NX(Y) represents net exports (exports

minus imports) as a decreasing

function of income.


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The LM curve is the set of

points, different

combinations of incident

produced in the economy of

the income and the rate atwhich money market is in

equilibrium.


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The LM Curve is the Market of Money Graphical Representation

To output the LM curve graphically,you need the following

dependencies (charts)

With the increase in income, the

demand for money grows the

transactions, but generally at a slower

rate than the income

MT

Y

45

MT(Y)

Balance the demand for money

(trading and speculative) and

money supply (L)

MT

MS

45

L1

50

15020

180 1

L2PTO


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Third demand relationship

(investment) from interest rate

speculation

To output the LM curve graphically,you need the following

dependencies (charts)


r

MS

I(r)


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MT

Y

45

MT(Y)

MT

MS

45

r

MS

I(r)

r

Y

LM



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M = (k y - h y) P

where

k - coefficient of sensitivity of demand tochanges in the revenue transaction

h - coefficient of speculative demand

sensitivity to interest rate changes

P - price level

To analytically derive the LM curve is

needed following relationship (equation):


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The point of intersection of the IS and LM curves determines the level of income and theinterest rate at which equilibrium is achieved at the same time in the goods market

(aggregate demand equals aggregate supply) and the money market (money demand

equals money supply).

MODEL IS-LM

r

Y

LM

IS

Y*

r*


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It is easy to check the chart IS-LM model, the effect of fiscal policy

(increase revenue) is greater the flatter is the LM curve. At the sametime the interest rate changes are then relatively small. We then say

that fiscal policy is relatively more effective.

Similarly, the effectiveness of monetary policy increases the more, the

more the IS curve is flat. Changes in interest rates is relatively small,

and large changes in income.

This means that fiscal and monetary policy are interrelated.


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Keynesian is LMd