The IS-LM Model

Question 1

Investment-Saving curve

Answer 1

The basis for when the central bank decides to increase interest rate or release fiscal /monetary policies.

• Graphical
• Algebraic

Question 2

Liquidity Preference-Money Supply curve

Answer 2

Combines the equilibria in both of the marks from the Keynesian cross into the same model, in order to analyse the effects on the economy made by changes.

• Graphical
• Algebraic

Question 3

IS-LM Model

Answer 3

Uses equilibrium conditions in each market to simultaneously determine the equilibrium values for the level of output and the rate of interest.

• The IS curve plots combinations of the interest rate and the level of output for which the market for goods and services are in equilibrium.
• The LM curve plots combinations of the interest rate and the level of output for which the market for money is in equilibrium.