IS-LM model Flashcards
What’s the first way of expressing equilibrium (keynes)
Y = C + I + G
What is the second way of expressing equilibrium (keynes)
S + T = I + G
What is the third way of expressing equilibrum? (Keynes)
I^r = I I^r = Actual investment I = Desired investment
At all points on the IS curve, the goods market is:
In equilibrium
The IS curve slopes:
Downward
According to Keynes, you can hold your assets in:
Bonds or Money
What are the motives for demanding money
- Transaction demand
- Precautionary demand
- Speculative demand
What is speculative demand
Demand that comes about because of the relationship between bonds prices and the rate of interest
LM shows us all the points where:
The money market is in equilibrium
The axis on the LM curve are:
Income - X axis
Interest rate - Y axis
The LM curve slopes:
Upward
What is the money demand equation?
co +c1Y + c2r
What is the factor that affects the slope of the LM curve?
Elasticity of money demand
When interest elasticity of money demand is low, the LM curve is:
Steep
When interest elasticity of money demand is high, the LM curve is:
Flatter
When c1 is high, the LM curve is:
Steep
Equilibrium between IS and LM gives us equilibrium in the:
- Goods market
- Money market
- Bond market
When we increase the money supply, the rate of interest:
Falls
What are the implications of the expectations of the relation between consumption and income?
- Consumption is likely to respond less than one-for-one in current income
- Consumption may move even if current income does not change
What are rational expectations?
Expectations formed in a forward looking manner
What are static expectations?
People expect the future to be like the present
The net effects of the three shifts in the IS curve depends on:
- Timing
- Composition
- Initial situation
- Monetary
