Lecture 5: IS-LM Model (Theory and
Applications)
Dozie Okoye
Dalhousie University
Winter 2019

Learning Goals
The IS Curve
The LM Curve
Short-Run Equilibrium: The IS-LM Model
Applying the IS-LM Model
Stabilization Policy
Background: The Depression
Unemployment in the Depression:
Economics 2201
Lecture 5: IS-LM Model (Theory and Applications)

Learning Goals
The IS Curve
The LM Curve
Short-Run Equilibrium: The IS-LM Model
Applying the IS-LM Model
Stabilization Policy
Background: Keynes
Economics 2201
Lecture 5: IS-LM Model (Theory and Applications)

Learning Goals
The IS Curve
The LM Curve
Short-Run Equilibrium: The IS-LM Model
Applying the IS-LM Model
Stabilization Policy
Background: Keynes
According to Keynes:
I shall argue that the postulates of the classical theory
are applicable to a special case only and not to the
general case, the situation which it assumes being a
limiting point of the possible positions of equilibrium.
Moreover, the characteristics of the special case assumed
by the classical theory happen not to be those of the
economic society which we actually live,
with the result
that its teaching is misleading and disastrous if we
attempt to apply it to the facts of experience
.
Economics 2201
Lecture 5: IS-LM Model (Theory and Applications)

Learning Goals
The IS Curve
The LM Curve
Short-Run Equilibrium: The IS-LM Model
Applying the IS-LM Model
Stabilization Policy
Goals
At the end of this lecture, we should:
I
Describe how national income (AD) is determined in the short
run
I
Explain how the goods and financial markets interact to
determine demand and income in the short run
I
Understand the variables that shift the AD curve and why
I
Fully illustrate how monetary and fiscal policies influence
aggregate demand
Economics 2201
Lecture 5: IS-LM Model (Theory and Applications)

Learning Goals
The IS Curve
The LM Curve
Short-Run Equilibrium: The IS-LM Model
Applying the IS-LM Model
Stabilization Policy
The Keynesian Cross
Interest, Investment and the IS Curve
The IS Curve
The
IS curve
shows the relationship between the
interest rate
and
income
in the market for goods and services
IS stands for Investment-Saving
Economics 2201
Lecture 5: IS-LM Model (Theory and Applications)

Learning Goals
The IS Curve
The LM Curve
Short-Run Equilibrium: The IS-LM Model
Applying the IS-LM Model
Stabilization Policy
The Keynesian Cross
Interest, Investment and the IS Curve
The Keynesian Cross and Expenditure
In the short run, income is determined by
desire
to spend
Spending is done by:
I
Households
I
Firms
I
Governments
Economics 2201
Lecture 5: IS-LM Model (Theory and Applications)