Essay on IS LM Macro York.docx - \u201cThe IS-LM model demonstrates that quantitative easing achieves an increase in real economic activity.\u201d Discuss and

Essay on IS LM Macro York.docx - u201cThe IS-LM model...

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“The IS-LM model demonstrates that quantitative easing achieves an increase in real economic activity.” Discuss and evaluate this statement.The IS-LM model is one of the most important concepts of macroeconomics. This model represents is represented by two curves, which are named IS and LM. The IS or the investment and saving curve shows the relationship between interest rates and investment and saving. The liquidity preference/money supply (LM) curve represents the real money available for investment and how that relates with the interest rate. The IS curve is based on the goods market. An increase in the interest rate decreases the demand for goods in a certain level of output, and this leads to a decrease in the equilibrium level of output “Y” or a decrease in the level of national income. When the interest rate increases, the cost of borrowing becomes larger. Therefore the investment goes down. Hence the IS curve is downward sloping. The position of the IS curve is determined by theexogenous elements of the aggregate demand which are exogenous consumption, taxes and government spending. (if you hypothetically consider the closed economy). The changes in any ofthe mentioned variables will shift the IS curve. The slope of the IS curve is determined by the responsiveness aggregate demand for interest rates. An increase in the interest elasticity of investment willlead to a flatter IS curve whilst a decrease in interest elasticity of investment will lead to a steeper IS curve.
The LM curve on the other hand is based on the money market. An increase in income at a given interest rate leads to an increase in the demand for money. This in return increases the equilibrium interest rate. The equilibrium in the financial markets means that theLM curve is upward sloping.

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