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This guide elaborates on the IS Curve, focusing on planned versus actual spending in the goods market. It introduces the equilibrium condition, where actual spending equals planned spending, defined as Y = E. The relationship between investment spending and interest rates is explored, illustrating how I = I(r) leads to market equilibrium. Additionally, the document discusses the interaction of the money market with the LM Curve, establishing equilibrium where real money supply equals real money demand. Key concepts include the roles of consumption, investment, and government spending in determining output.
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Class Slides for EC 204Spring 2006 To Accompany Chapter 10
The Goods Market and the IS Curve Planned Spending = E = C + I + G E = C(Y-T) + I + G Actual Spending = Y Equilibrium: Actual Spending = Planned Spending Y = E
The Interest Rate, Investment and the IS Curve Suppose Investment Spending depends on the interest rate: I = I(r) Equilibrium: Y = C(Y-T) + I(r) + G (IS Curve)
Loanable-Funds Interpretation of IS Curve Y - C - G = I S = I Y - C(Y-T) - G = I(r) S(Y) = I(r)
The Money Market and the LM Curve Equilibrium in the Money Market: Real Money Supply = Real Money Demand M/P = L(r, Y) (LM Curve)
The Short-Run Equilibrium Y = C(Y-T) + I(r) + G (IS) M/P = L(r, Y) (LM)
