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Macroeconomics SEM 2 > IS-LM > Flashcards

IS-LM Flashcards

1
Q

What is the National Account Identity?

A

Y = C + I + G + NX

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2
Q

What is Y?

A

Actual Production

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3
Q

What is Planned Expenditure?

A

E = C + I + G + NX

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4
Q

What two things are equal in equilibrium?

A

Y = E

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5
Q

What does it mean if E < Full Employment Production Yf?

A

Excess Supply

Deflationary Gap- Spare Capacity + Unemployment will rise

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6
Q

What does it mean if E > Full Employment Production Yf?

A

Excess Demand

Inflationary Gap

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7
Q

What does IS mean?

A

Investment - Saving curve

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8
Q

How is the IS curve derived?

A

Keynesian-cross model

Vary I.R + find associated level of Equilibrium Income

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9
Q

What does changing the I.R do?

A

Changes Planned Expenditure- C + I affected

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10
Q

How is the IS curve formed?

A

Adjust I.R –> Find associated level of E
- Shift E on Keynesian Cross Model
Find where E crosses 45º line + Join points on IS graph

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11
Q

What does LM mean?

A

Liquidity - Money curve

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12
Q

What time frame does the IS-LM model describe?

A

Very SR- Price Levels are Fixed

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13
Q

What does it mean for the LM curve if Price levels are fixed?

A

Cannot adjust to bring Equilibrium in Money Market

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14
Q

What happens in SR when M.S changes?

A

Prices do NOT change- I.R adjusts

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15
Q

What varies to make I.R adjust?

A

Income

e.g. Higher Income –> Higher M.D –> Increased I.R

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16
Q

Why is Money Demand Downward sloping?

A

Due to Liquidity Preferences

  • Low I.R- people prefer to hold more Liquid Cash
    • Anticipate Higher I.R/Returns in Future
17
Q

What is the I.R in terms of Opportunity Cost?

A

Opportunity Cost of Holding Money

18
Q

How is LM curve formed?

A

Change in Income (Y) –> M.D Shifts –> I.R adjusts

19
Q

What does it mean at the Intersection of IS-LM?

A

Y = E & M.D = M.S

Equilibrium in Goods Market + Money Market

20
Q

What happens if M.S Decreases?

A

LM Shifts LEFT –> Decreased Y + Increased I.R

21
Q

How is AD curve derived from IS-LM model?

A

Increased Price Level –> Decreased Real M.S –> LM Shift LEFT –> Decreased Y + Increased I.R

  • AD shows relationship between P + Y
    • So, in space P,Y- IS_LM predicts NEGATIVE Relationship between P and Y–> AD Curve

Macroeconomics SEM 2 (13 decks)

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