Chapter 24 - The ISLM world. In this chapter you will learn to identify the shift and slope determinants of the LM curve, identify the shift and slope determinants of the IS curve, understand how combining the IS and LM curves determines an equilibrium level of real GDP and interest rate, explain how ISLM analysis is connected to the aggregate demand curve. | Chapter 24 The ISLM World Copyright © 2009 Pearson Addison-Wesley. All rights reserved. Learning Objectives • Identify the shift and slope determinants of the LM curve • Identity the shift and slope determinants of the IS curve • Understand how combining the IS and LM curves determines an equilibrium level of real GDP and interest rates • Explain how ISLM analysis is connected to the aggregate demand curve Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 24-2 Introduction • ISLM analysis—a more complex model of GDP determination – Shows how monetary and fiscal policy interact – Shows what determines the relative multiplier effects of each – Provides a partial integration of the classical and Keynesian systems into one conceptual framework – Demonstrates some of the fundamental features distinguishing classical and Keynesian outlooks Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 24-3 1 Introduction (Cont.) • Initially assume a fixed price level—concerned with the level of real GDP • Followed by an analysis of the implications of flexible wages and prices • Ultimately the discussion shows how the ISLM model collapses into an aggregate demand schedule Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 24-4 The LM Curve • Classical economists stressed the transactions demand for money • Keynes had a more complex view of the transactions demand – Since transactions demand increases with income, the rate of interest rises as income rises – Not only does the interest rate help determine income (classical view), income helps determine the interest rate (Keynesian) Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 24-5 The LM Curve (Cont.) • Keynesian View (Cont.) – Causation runs both ways—from interest rate to income and from income to the interest rate – A reformulation of the model permits determination of both interest rates and income Copyright © 2009 Pearson Addison-Wesley. All rights .
