`IS-LM Flashcards
what does IS-LM describe?
equilibrium in goods market and the money market and together determines general equilibrium in the economy
what does IS stand for?
Investment and savings
what does LM stand for?
liquidity and money
what links the goods and money marekts?
the rate of interest
what is aggregate expenditure?
the total amount of goods and services that people want to buy
across the whole economy. It is the sum of four components
what is aggregate expenditure the sum of?
consumption + planned investment + government purchases + net exports
what is the real interest rate?
the opportunity cost of spending money this year
where is the IS curve derived from?
the Keynesian cross diagram
what does the IS curve show?
an inverse relationship between the interest rate and output
the slope of the IS curve depends on what?
how responsive consumption and investment expenditures are to changes in interest rates and on the size of the multiplier
how do shifts in the IS curve come about?
as a result of changes in autonomous expenditure
A rise in government spending, independent of any change in
interest rates, would lead to a shift of the IS curve to which side?
the right
a fall in exports would lead to a shift of the IS curve to what side?
the left
what are investments?
the purchase of new capital, such as equipment or buildings
If a person spends less than they earn and uses the rest either put in a bank, or to buy stocks or investment funds, economists call this?
saving
what is national saving?
the total income in the economy that remains after paying for consumption and government purchase
what is private saving?
the amount of income that households have left after paying their taxes and paying for their consumption
what is public saving?
the amount of tax revenue that the government has left after paying for its spending
why does the government run a budget surplus?
because it receives more money than it spends
why does the government run a budget deficit?
because it spends more money than it receives in tax revenue
what is the market for loanable funds?
the market in which those who want to save supply funds and those who want to borrow to invest demand funds.
what are loanable funds?
all income that people have chosen to save and lend out, rather than use for their own consumption.
where does the supply of loanable funs come from?
people who have extra income they want to save and lend out.
where does the demand for loanable funds come from?
households and firms that wish to borrow to make investments.
