Unformatted text preview: Expenditure Multiplier ISLM Model To understand how i aﬀects Y , we need to know how Y is
determined in the market for goods and services. ISLM is widely used for analysis of the eﬀects of monetary
policy on the economy. Developed by Hicks (1937), based on ideas in Keynes’ General
Theory of Unemployment, Interest and Money (1936). ISLM is a model of the economy that explains how M , i and
Y are determined in the economy. We know how the money supply M and interest rates i are
related from equilibrium in the money market. But how is i
and therefore M related to aggregate output Y ? The ISLM Model Aggregate Output ...
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