Topic 2 - IS-LM model Flashcards
what changes are made to the Keynesian cross to derive the IS curve
short run model - assume prices stay fixed
Assume there is no full employment level of output
what does a change in interest rate do to the IS curve
movement along the curve
what is our incentive to buy bonds if interest rates are low
less of an incentive
what is the relationship between interest rates and real money demand
Negative
what does IS stand for
Investment savings
what does LM stand for
liquidity money
what does the LM curve represent equilibrium in
the financial market
what does the IS curve represent equilibrium in
the goods market
from which graph do you derive the IS curve
Keynesian cross
from which graph do you derive the LM curve
diagram of the market for real money balances
why does the real money demand curve slop downwards
when interest rates are high people hold more bonds and less cash
why is the LM curve flat
once the central bank has chosen its interest rate, equilibrium will be reached at this level no matter the demand for real money balances
what is the affect of an increase in government spending on demand for real money
shift to the right
at
