Chapter 9 - CHAPTER 9 The IS-LM Model Macroeconomic...

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CHAPTER 9The IS-LM Model: MacroeconomicEquilibrium with Fixed Prices
QuestionsWhat is the IS curve?How do changes in interest rates affect the equilibrium level of production and income in a sticky-price model?What determines the money market equilibrium with sticky prices?What is the LM curve?
QuestionsWhat is an IS shock?What is an LM shock?What is the IS-LM equilibrium? How do different shocks affect the IS-LM equilibrium?
QuestionsWhat is the relationship between shifts in the equilibrium on the IS-LM diagram and changes in the real exchange rate?What is the relationship between shifts in the equilibrium on the IS-LM diagram and changes in the balance of trade?
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Figure 9.1 - Autonomous Spending as a Function of the Real Interest Rate
The Investment-Saving(IS) CurveBecause a change in the real interest rate changes autonomous spending, it will change the equilibrium level of real GDPthe effect will be equal to the interest sensitivity of autonomous spending (Ir+ Xr) times the multiplier
The Investment-Saving(IS) CurveTo find a point on the IS curve:pick a value for the real interest rate and determine the level of autonomous spending at that interest rateuse the income-expenditure diagram to determine the equilibrium level of real GDPRepeat this procedure to find other points on the IS curve
Figure 9.2a - The IS Curve
Figure 9.2b - The IS CurveThe IS curve plots for each rthe corresponding Ythat is consistent with equilibrium in the goods marketThe IS curve plots for each rthe corresponding Ythat is consistent with equilibrium in the goods market
Figure 9.2c - The IS Curve
Equation of the IS CurveDefine baseline autonomous spending(A0) to include the determinants of autonomous spending that do not depend on the real interest rater)X(I-)]rXXY(XGIC[Arrfrff000)]rXXY(XGIC[Afrff0000r)X(I-AArr0
Equation of the IS Curve

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