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
Change in monetary policy
= LM shifts right
Deriving AD
Increase PL
Decrease real money balances
Shifts LM left
-increases equilibrium IR, decreases NY
AD=
Inverse relationship between PL and NY
Tightened FPolicy
IS left
AD left
Loosens monetary policy
LM right
AD right
Liquidity trap
After repeated expansions of MS, the IR can’t go any lower
Autonomous expenditure
Spending which isn’t dependent on income or output
