IS-LM Model Overview

Point A = Equilibrium in the money market Demand for money = Increases with higher output Increase in interest rate = Leads to a fall in demand for money Money supply increase = Results in demand for money being smaller than supply

LM curve = Represents the relationship between interest rates and money supply Output increase = Leads to higher demand for money Central bank influence = Determines the exogenous supply of money Bonds = Assets that pay an interest rate and are issued by government

Demand for money falls = When interest rates increase Equilibrium is disrupted = When money supply is expanded Demand for bonds = Decreases as bond prices rise Utilities of money = Comes from the services it provides

<p>Income increase = Larger cash demand Interest rate decrease = Could restore equilibrium Money supply expansion = Creates excess supply of money Decreasing demand for bonds = Occurs as the price of bonds increases</p> Signup and view all the answers

<p>Non-equilibrium at Point A = Demand for money is less than supply Increasing output is necessary = To restore demand for money Interest rate influence = Can adjust money demand Portfolio allocation = Divides wealth between money and bonds</p> Signup and view all the answers

<p>When output increases = Demand for money rises When central bank raises money supply = Demand for money may fall below supply When interest rates rise = Demand for money decreases When utility from money is increased = Alienates interest rate impacts</p> Signup and view all the answers

<p>Central bank = Sets the exogenous supply of money Output levels = Influences demand for cash Interest rates = Impact demand for money Bonds pricing = Affects bond demand inversely</p> Signup and view all the answers

<p>Demand for money = Higher when facing increasing income LM curve = Increases with both interest rate decline and output increase Interest rate reduction = Stimulates demand for money Cash requirements = Rise with higher consumer wealth</p> Signup and view all the answers

<p>Expansionary Monetary Policy = Reduces interest rates and increases output Expansionary Fiscal Policy = Increases interest rates and output Decrease in Marginal Propensity to Save = Increases interest rates and output Drop in Consumer Confidence = Increases private savings</p> Signup and view all the answers

<p>Money Supply = Remains unchanged with a drop in consumer confidence Money Demand = Remains identical at the original interest rate Investment = Depends on interest rates and business sentiment Savings = Increases with a drop in consumer confidence</p> Signup and view all the answers

<p>Drop in Consumer Confidence = Impacts savings but not investment Increase in Expenditures = Increases interest rates and output Tax-Cut = Increases interest rates and output Increase in Money Supply = Reduces interest rates</p> Signup and view all the answers

<p>Goods Market = Equilibrium is affected by fiscal policy Money Market = Equilibrium is affected by monetary policy Private Savings = Increases with lower consumer confidence Investment Dynamics = Is influenced by interest rates</p> Signup and view all the answers

<p>Initial Interest Rate and Output = Equilibrium remains unchanged with certain shocks Fiscal Policy Increase = Shifts output and interest rate upwards Consumer Confidence Drop = Leads to greater private savings Interest Rate Constancy = Investment remains unaffected</p> Signup and view all the answers

<p>Expansionary Monetary Policy = Increases output in the short run Shock with No Impact = Equilibrium stays at original interest and output levels Investment Constancy = Assumed unchanged due to stable interest rates Private Savings Growth = Triggered by a drop in consumer confidence</p> Signup and view all the answers

<p>Decrease in Marginal Propensity to Save = Increases interest rates in the economy Expansionary Fiscal Policy = Shifts the interest rate upwards Increase in Investment = Not affected when interest rates are stable Increase in Consumer Confidence = Potentially reduces private savings</p> Signup and view all the answers

<p>Drop in Consumer Confidence = Increases private savings Increase in Taxation = Raises interest rates and output Increase in Money Supply = Lowers interest rates Stable Interest Rates = Keeps investment levels constant</p> Signup and view all the answers

<p>Equilibrium Price = The price at which the quantity of bonds demanded equals the quantity supplied Expansionary Monetary Policy = Increase in money supply leading to lower interest rates Supply of Bonds = Fixed amount of government bonds available in the market Central Bank = The institution that manages a country's currency and monetary policy</p> Signup and view all the answers

<p>Increase in Bond Supply = Equilibrium price falls, interest rate rises Decrease in Bond Supply = Equilibrium price rises, interest rate falls Increase in Demand for Bonds = Equilibrium price rises, interest rate falls Central Bank Buys Bonds = Consumers' cash holdings increase, bond holdings decrease</p> Signup and view all the answers

<p>Market-determined price = Central bank sets quantity of bonds Interest rate target = Central bank sets the price at which it buys or sells bonds Exchange rate control = Policy targeting currency value against another currency Money supply control = Central bank influences money available in the economy</p> Signup and view all the answers

<p>IS-LM Model = Represents interaction between interest rates and real output Supply of Government Bonds = Influences equilibrium price and consumer investment Central Bank Operations = Regulates money supply by buying and selling bonds Consumers’ Wealth = Determines asset allocation between cash and bonds</p> Signup and view all the answers

<p>Bonds = Debt securities issued by governments to borrow money Cash = Currency available in the hands of the consumers Interest Rate = The return on investment given for holding bonds Central Bank Reserves = Assets held by the central bank to manage monetary policy</p> Signup and view all the answers

<p>Consumers hold more cash = Decreased demand for bonds Central bank increases money supply = Interest rates decrease Bond prices increase = The implicit yield on bonds decreases Supply of bonds decreases = Equilibrium price increases</p> Signup and view all the answers

<p>Buying Bonds = Increases cash supply for consumers Selling Bonds = Decreases cash supply for consumers Lowering Interest Rates = Stimulates investment in bonds Increasing Bond Prices = Reduces the return on newly issued bonds</p> Signup and view all the answers

<p>Implicit Yield = The effective return on bonds considering market conditions Bond Demand = The desire to purchase bonds at given prices Fixed Bond Supply = The limitation in quantity of bonds available for investment Market Price = The current rate at which bonds can be bought or sold</p> Signup and view all the answers

<p>Consumer sentiment = The degree of confidence consumers have in the economy Investment = The allocation of resources to generate future benefits Interest rate = The cost of borrowing capital Equilibrium = A state where savings equal investment</p> Signup and view all the answers

<p>Savings = Tends to increase when output rises Investment = Decreases as interest rates rise Business sentiment = Influences investment decisions Output = Affects the intersection of savings and investment</p> Signup and view all the answers

<p>C = Represents consumer spending I = Denotes investment levels i = Refers to the interest rate 1-c = Indicates the marginal propensity to save</p> Signup and view all the answers

<p>Decrease in interest rate = Increases investment Increase in output = Leads to higher savings Higher consumer confidence = Reduces savings rates Stable interest rate = Maintains current levels of investment</p> Signup and view all the answers

<p>Increasing output = Shifts the point of equilibrium Downward sloping curve = Represents the IS relationship Equal savings and investment = Found at equilibrium point A Investment adjustment = Occurs with changes in interest rates</p> Signup and view all the answers

<p>Elasticity of substitution = Assumes a constant level of consumer preference Business sentiment improvement = Encourages increased investment Reduction in consumption = Occurs when savings exceed investment Fiscal policy changes = Can influence (1-c) rates</p> Signup and view all the answers

<p>High consumer sentiment = Reduces the savings rate Low interest rates = Stimulates investment growth Increased savings = Leads to lower investment levels Equilibrium state = Maintains balance between savings and investment</p> Signup and view all the answers

<p>Investment inversely proportional to interest rate = Higher rates reduce capital accumulation Changes in interest rate = Affect the level of investment Savings greater than investment = Indicates a shift in equilibrium Stability in investment = Requires consistent consumer confidence</p> Signup and view all the answers

<p>IS Curve = Represents the relationship between interest rates and investment LM Curve = Represents money demand and supply equilibrium Portfolio Decision = Choice between holding cash or bonds Savings = Resources set aside after production and taxes</p> Signup and view all the answers

<p>Increase in interest rates = Leads to reduced investment Interest rates and savings = Assumed to be unaffected in this model Rise in output = Increases money demand Higher money supply = Leads to disequilibrium at point A</p> Signup and view all the answers

<p>Increased money supply at point A = No impact on savings or investment Shift in LM to the right = Indicates increased money demand Cash versus bonds decision = Involves opportunity cost IS curve staying constant = Savings and investment remain the same</p> Signup and view all the answers

<p>Substitution effect = People switch from cash to bonds when rates rise Income effect = Overall buying power changes due to interest rates Disequilibrium = Occurs when money supply exceeds demand Equilibrium adjustment = Output goes up when moving right from point A</p> Signup and view all the answers

<p>Investment vs. savings = Highlighting their differences in economy Interest rates and output = Critical for assessing market conditions Macroeconomic intuitions = Understanding complex relationships Resources in bonds = Reflection of opportunity cost decisions</p> Signup and view all the answers

<p>IS-LM Model = Describes interactions between the goods and money markets Liquidity preference = Focuses on the demand for money Equilibrium point = Where IS and LM curves intersect Market forces = Influence shifts in IS and LM schedules</p> Signup and view all the answers

<p>Point A = Savings are larger than investment Point B = Savings equal investment Point C = Increased output due to higher interest rates Point D = Output and savings decrease, interest rates drop</p> Signup and view all the answers

<p>Moving to the right from Point A = Increases savings but keeps investment constant Moving to the left from Point A = Decreases output and savings Increase in consumer confidence = Shifts the IS curve to the right Decrease in consumer confidence = Shifts the IS curve to the left</p> Signup and view all the answers

<p>Increase in money supply = May lead to lower interest rates Decrease in money supply = May lead to higher interest rates Higher interest rates = May decrease investment Lower interest rates = May increase consumer spending</p> Signup and view all the answers

<p>Recession = Fall in output and consumer confidence Investment stagnation = Output remains constant but savings increase Interest rate parity = Maintains level of investment despite changes in output Savings surplus = Occurs when savings exceed investment in the economy</p> Signup and view all the answers

<p>High output = Increases savings while keeping investment constant Low output = Decreases savings and potentially lower interest rates Equilibrium at point A = Money supply equals money demand Shift in LM curve = Occurs with changes in money supply</p> Signup and view all the answers

<p>Upward movement in IS curve = Worsens the gap between savings and investment Downward movement in IS curve = Reduces the gap between savings and investment Horizontal movement in LM curve = Indicates constant interest rates while output changes Vertical movement in LM curve = Reflects changes in money supply affecting interest rates</p> Signup and view all the answers

<p>Rise in savings = Fall in consumer confidence Stagnant investment = Interest rates persisting at a low level Decrease in output = Same interest rates but reduced economic activity Increase in output = Same investment levels yet rising savings</p> Signup and view all the answers