Macroeconomic Analysis for Management
Lecture 9
IME, IIT Kanpur
Goods Market and Money Market: the ISLM
Model
The Goods Market and the IS RelationIn Goods Market equilibrium, we discussed demandZas the sum ofconsumption, investment, and government spending.Z=C+c(YT) +I+GWe now let Investment to be affected by ‘i’. Assuming a linear relationbetween investment and interest rate,I=abi.Then, in equilibrium,Y=C+c(YT) + (abi) +G. Why did we writeYon the LHS?
The Goods Market and the IS RelationIn Goods Market equilibrium, we discussed demandZas the sum ofconsumption, investment, and government spending.Z=C+c(YT) +I+GWe now let Investment to be affected by ‘i’. Assuming a linear relationbetween investment and interest rate,I=abi.Then, in equilibrium,Y=C+c(YT) + (abi) +G. Why did we writeYon the LHS?
The IS Curve and its shifts
Income, Output,
Y
Interest rate, i
0
i
Y
IS
1
Shifts of the IS Curve
An exogenous increases in government expenditure by dG shifts IScurve outward. By how much?
The IS Curve and its shifts
Income, Output,
Y
Interest rate, i
0
i
Y
IS
1
Y
IS
2
An increase in
G
increases
Y
.
Shifts of the IS Curve
An exogenous increases in government expenditure by dG shifts IScurve outward. By how much?
The IS Curve and its shifts
Income, Output,
Y
Interest rate, i
0
i
Y
IS
1
Y
IS
2
An increase in
G
increases
Y
.
By
dG
(1

c
)
amount.
Shifts of the IS Curve
An exogenous increases in government expenditure by dG shifts IScurve outward. By how much?
The IS Curve and its shifts  II
Income, Output,
Y
Interest rate, i
0
IS
1
i
Y
An increase in
T
decreases
Y
.
Shifts of the IS Curve
An exogenous increase in taxes shifts IS curve inward. By how
much?
The IS Curve and its shifts  II
Income, Output,
Y
Interest rate, i
0
IS
1
i
Y
An increase in
T
decreases
Y
.
IS
2
Y
By
c
(1

c
)
dT
amount.
Shifts of the IS Curve
An exogenous increase in taxes shifts IS curve inward. By how
much?
Money Market and LM Relation
Recall the equilibrium condition in Money Market:
M
=

Y L
(
i
)
The left side is the Money stock in the economy. And the right side
shows the demand for money, which depends upon income (positive
relation) and interest rate(negative relation).
Money Market and LM Relation
Recall the equilibrium condition in Money Market:
M
=

Y L
(
i
)
The left side is the Money stock in the economy. And the right side