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Jul 17, 2018 · This video derives the IS and LM curves and then solves for the equilibrium interest rate, including the equilibrium level of income, consumption, and investment.
- 6 min
- 40K
- Economics in Many Lessons
In this problem, we're given equations that describe this economy, we're asked to explain each part of each equation, then derive the IS Curve and calculate ...
- 13 min
- 279.5K
- economicurtis
- What Is The IS-LM Model?
- Understanding The IS-LM Model
- Characteristics of The IS-LM Graph
- Limitations of The IS-LM Model
- The Bottom Line
The IS-LM model, which stands for “investment-saving” (IS) and “liquidity preference-money supply” (LM), is a Keynesian macroeconomic model that shows how the market for economic goods interacts with the loanable funds market, or money market. It is represented as a graph in which the IS and LM curves intersect to show the short-run equilibrium bet...
British economist John Hicks first introduced the IS-LM model in 1937, not long after fellow British economist John Maynard Keynes published "The General Theory of Employment, Interest, and Money" in 1936. Hicks’ model served as a formalized graphical representation of Keynes’ theories, though it is used mainly as a heuristicdevice today. The three...
The IS-LM graph consists of two curves: IS and LM. GDP is placed on the horizontal axis, increasing to the right. The interest rate makes up the vertical axis.
Many economists, including many Keynesians, object to the IS-LM model for its simplistic and unrealistic assumptions about the macroeconomy. It cannot account for simultaneous high unemployment and inflation in the economy. It is also undercut by the change by central banks to using an interest-rate rule rather than targeting the money supply. Even...
The IS-LM model is a tool for looking at how the market for economic goods intersects with the loanable funds market. It depicts the short-term equilibrium point between interest rates and output, with its three variables being liquidity, investment, and consumption. Because it is a highly simplistic device, it is only useful when snap decisions mu...
There are many ways to algebraically solve this system. For example, the IS Curve could be set equal to the LM Curve, and the resulting equation solved for Y. The approach in the appendix is to plug the expression for the LM Curve into the right hand side of the expression for the spending
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The LM curve gives the combinations of income and the interest rate for which the demand for money (or desired liquidity) equals the money supply and hence for which the domestic economy is in asset or stock equilibrium.
Jun 10, 2024 · LM Curve. The LM curve represents the combinations of the interest rate and income such that money supply and money demand are equal. The demand for money comes from households, firms, and governments that use money as a means of exchange and a store of value.
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Suppose r is set by the Fed at the level of r* (we will explore this in depth later in the course). For a given r, we can solve for the level of output desired by the demand side of the economy. We represent the demand side of the economy, drawn in {r, Y} space as the I -S curve . Why IS?
