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Chapter 5: IS-LM Model. Equilibrium in goods market: IS curve Equilibrium in financial market: LM curve Monetary policy Fiscal Policy Monetary and Fiscal Policy mix. Deriving the IS curve. The IS curve shows all the eq. points in the goods market for different interest rates!.

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Chapter 5 is lm model

Chapter 5: IS-LM Model

  • Equilibrium in goods market: IS curve

  • Equilibrium in financial market: LM curve

    • Monetary policy

    • Fiscal Policy

      • Monetary and Fiscal Policy mix


Deriving the IS curve

The IS curve shows all the eq. points in the goods market for different interest rates!


Shifters of the IS curve

  • Fiscal policy variables:

  • Government spending

  • Taxes


Deriving the LM curve

The LM curve shows all the eq. points in the money market for different interest rates!


Shifters of the LM curve

  • Monetary policy variables:

  • Money supply

  • Price level


IS-LM framework

We can analyze the effect of monetary and fiscal policies and answer the question: what determines the interest rate and output in the short run!


IS-LM framework (changes to fiscal policy)

The Effects of an Increase in Taxes


IS-LM framework (changes to monetary policy)

The Effects of a Monetary Expansion (M increases)


Does the IS-LM framework apply to the real world (2001)?

Figure 1 The U.S. Growth Rate, 1999–1 to 2002–4


Does the IS-LM framework apply to the real world?

Figure 2 The Federal Funds Rate, 1999–1 to 2002–4


Does the IS-LM framework apply to the real world?

Figure 3 U.S. Federal Government Revenues and Spending (as Ratios to GDP), 1999–1 to 2002–4


Does the IS-LM framework apply to the real world (2008)?

Figure 1 The U.S. Growth Rate, 2006–1 to 2013–2


Does the IS-LM framework apply to the real world?

Figure 2 The Federal Funds Rate, 2006–1 to 2013–2


Does the IS-LM framework apply to the real world?

Figure 3 U.S. Federal Government Revenues and Spending (as Ratios to GDP), 2006–1 to 2010–2


Does the IS-LM framework apply to the real world?

Figure 4 The U.S. Recessions of 2001/2008 and the policy response


Does the IS-LM framework apply to the real world?

Figure 5-9 The Empirical Effects of an Increase in the Federal Funds Rate (cont.)


Does the IS-LM framework apply to the real world?

Figure 5-9 The Empirical Effects of an Increase in the Federal Funds Rate (cont.)


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