The IS LM Model - The IS-LM Model(graphs and tables from...

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The IS-LM Model (graphs and tables from A&B Ch. 9) Production: Full Employment (FE) line, which describes combinations of output and interest rates such that labor markets are in equilibrium Goods market equilibrium condition, which describes combinations of Y and r such that Y = C + I + G ( which is equivalent to I = S, hence the IS curve) Money market equilibrium, which describes combinations of Y and r such that real money supply equals real money demand (LM curve) When all three intersect, they we’re at “General Equilibrium”, i.e. full production (Y*). All three lines always intersect in the classical model. FE Line Shifts right if: L S increases Productivity Increases Capital Increases Note that if the FE curve doesn’t shift, that means Y*, real wage, and N* don’t change.
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Deriving the IS Curve What happens to the real interest rate when income rises based on the goods market (i.e. loanable funds market)? Output increases when r decreases because C increases and I increases (Y=C+I+G)
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Deriving the LM Curve: What happens to the real interest rate when income increases in the asset market?
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