The IS Сurve

The IS Сurve

The LM Curve

3. Shifts, Points of The IS-LM Model & Incorporation Into Larger Models

Precautionary Measure – запобіжний захід

Transactions Demand for Money– попит на гроші для здійснення операцій, трансакційний попит

The IS Сurve

The IS-LM model is a macroeconomic tool that demonstrates the relationship between interest rates and real output in the goods and services market and the money market. The intersection of the IS and LM curves is the " General Equilibrium" where there is simultaneous equilibrium in both markets. IS-LM stands for Investment Saving — Liquidity preference Money supply.

For the IS curve, the independent variable is the interest rate and the dependent variable is the level of income (even though the interest rate is plotted vertically).

In equilibrium, all spending is desired or planned; there is no unplanned inventory accumulation (or, equivalently, when " leakages" from the circular flow equal " injections").

The IS curve is defined by the equation

Y = C(Y - T) + I(r) + G + NX(Y)

where Y represents income, C(Y − T) represents consumer spending as an increasing function of disposable income (income, Y, minus taxes, T), I(r) represents investment as a decreasing function of the real interest rate, G represents government spending, and NX(Y) represents net exports (exports minus imports) as a decreasing function of income. In this equation, the level of G is presumed to be exogenous, meaning that it is taken as a given.

The IS curve describes equilibrium in the product market in terms of r and Y. The IS curve is downward sloping because as the interest rate falls, investment increases, thus increasing output.