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7/27/2019 Keynesian is LMd
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Keynesian IS-LM
DEEPAKS.Y.B.M.S.
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IS curve
IS curve is a set of points,
showing various combinations
of income generated in the
economy and interest rate atwhich the goods market is in
equilibrium.
Points lying outside the IS curve
means the goods market
imbalances of the economy
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To derive the IS curve graphically,
you need the following relations(graphs):
Condition 1
First function long-term savings
The IS CURVE-MARKET GOODS is shown GRAPHICALLY
S
Y
45
S(Y)
Condition 2balance on the marketgoods
S
I
45
Condition 3.dependency investment
from interest rate
r
I
I(r)
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S
Y
45
S(Y)
S
I
45
r
I
I(r)
r
Y
IS
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Equation 1:- Aggregate DemandAD = C + I + G+ NX(Y)
Where AD is Aggregate Demand,
C is Consumers Expenditure or
Consumption,I is the level of Investment ,
G is the level of Government
Expenditure,
and NX(Y) represents net exports (exports
minus imports) as a decreasing
function of income.
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The LM curve is the set of
points, different
combinations of incident
produced in the economy of
the income and the rate atwhich money market is in
equilibrium.
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The LM Curve is the Market of Money Graphical Representation
To output the LM curve graphically,you need the following
dependencies (charts)
With the increase in income, the
demand for money grows the
transactions, but generally at a slower
rate than the income
MT
Y
45
MT(Y)
Balance the demand for money
(trading and speculative) and
money supply (L)
MT
MS
45
L1
50
15020
180 1
L2PTO
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Third demand relationship
(investment) from interest rate
speculation
To output the LM curve graphically,you need the following
dependencies (charts)
The LM Curve is the Market of Money Graphical Representation
r
MS
I(r)
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MT
Y
45
MT(Y)
MT
MS
45
r
MS
I(r)
r
Y
LM
The LM Curve is the Market of Money Graphical Representation
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M = (k y - h y) P
where
k - coefficient of sensitivity of demand tochanges in the revenue transaction
h - coefficient of speculative demand
sensitivity to interest rate changes
P - price level
To analytically derive the LM curve is
needed following relationship (equation):
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The point of intersection of the IS and LM curves determines the level of income and theinterest rate at which equilibrium is achieved at the same time in the goods market
(aggregate demand equals aggregate supply) and the money market (money demand
equals money supply).
MODEL IS-LM
r
Y
LM
IS
Y*
r*
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It is easy to check the chart IS-LM model, the effect of fiscal policy
(increase revenue) is greater the flatter is the LM curve. At the sametime the interest rate changes are then relatively small. We then say
that fiscal policy is relatively more effective.
Similarly, the effectiveness of monetary policy increases the more, the
more the IS curve is flat. Changes in interest rates is relatively small,
and large changes in income.
This means that fiscal and monetary policy are interrelated.
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