Lecture_notes_4_2009 - Intermediate Macroeconomics I EC21A...

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Intermediate Macroeconomics I EC21A (Econ 2002) IS-LM Model
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The IS-LM Model: Introduction The IS-LM model was originally proposed by J. R. Hicks. Hicks suggests that there is interplay between the goods market and the money market. Equilibrium in the goods market is conditioned on equilibrium in the money market and (vice versa). The common variable is the interest rate.
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The IS-LM Model: Introduction We seek to derive two separate relationships between interest rate and the level of income by independently analyzing equilibrium in the goods market and equilibrium in the money market. Having done this, we will be able to derive a unique equilibrium level of income and interest rate.
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The IS-LM Model: Introduction To accomplish our goal we need to make interest rate an endogenous variable. We will use R to be a representative interest rate rather than any specific interest rate. R speaks of real interest rate rather than nominal interest rates.
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IS Curve Introduction The IS curve is the schedule that identifies the combination of income and interest rate at which the commodity market is in equilibrium.
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IS Curve Introduction To derive the IS curve we need to understand a few more basic relationships. That is, to see how aggregate expenditure (and hence income) responds to changes in interest rates we need to analyse how the individual components of aggregate expenditure responds to interest rate changes.
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The Investment Function Recall that investment is mainly a function of interest rates. Since interest rate is now allowed to vary then
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This note was uploaded on 12/15/2011 for the course ECON EC21A taught by Professor Georgiamcleod during the Fall '09 term at University of the West Indies at Mona.

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Lecture_notes_4_2009 - Intermediate Macroeconomics I EC21A...

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