Keynesian Economics And IS/LM Flashcards
Multiplier
1/1-MPC
Accelerator effect
Rate of change of AD to rate of change of I
45* line means
Shows all points where consumption spending = income
Vertical intercept of expenditure line= autonomous spending
Shallow expenditure line
MPW high
Multiplier low
Real money balances
What money can actually buy given the ratio of money supply to price level M/P
IS curve
Shows all possible points of equilibrium in goods market associated with a particular IR and level of income
IS: What happens to expenditure line if IR falls
Expenditure line shifts up
What does the IS show
Inverse relationship between IR and output
Slope is determined by responsiveness of C and I to changes in IR
What makes IS shift
Changes in autonomous expenditure
–if gov expenditure increases=shifts to RIGHT
LM curve
Shows all points where money market is in equilibrium given a combination of IR and national income
LM: increase I’m demand for money
Shifts DM curve up
As national income rises
Increases demand for money
- demand>supply= increases IR
Shifts in LM curve
If Central bank expands/contracts MS
- increase MS = decrease IR, shifts LM down to right
Equilibrium of IS/LM
Planned expenditure = actual expenditure
Demand for money=supply
Change in fiscal policy
= changes IS
