1
Chapter 5
Goods and Financial
Markets,The IS-LM Model
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Topics to be Discussed
? 5.1 The Goods Market Equilibrium
and IS Curve
? 5.2 Financial Markets and LM Curve
? 5.3 Goods and Financial Markets,IS-
LM Model
5.1 IS Curve
? The Goods Market Equilibrium
? The Demand = The Supply
? The Goods Market Equilibrium and the IS
Curve
? Conditions For Equilibrium,I=S (Classical
Method)
dReI ?? YbaS )1( ????
5.1 IS Curve
? S = 0.2Y - 40 I = 260 – 2000R
? Conditions For Equilibrium,S = I
? 0.2Y - 40 = 260 – 2000R
? IS Curve, Y = 1500 – 10000R (Classical
Method)
5.1 IS Curve
? Y = 1500 – 10000R
I S C u r v e
0
0, 0 2
0, 0 4
0, 0 6
0, 0 8
0, 1
0, 1 2
500 700 900 1100 1300 1500
Y
R
Y R
500 0, 1
700 0, 0 8
900 0, 0 6
1100 0, 0 4
1300 0, 0 2
1500 0
How to draw it?
R
Y
S
I
450
IS I
r1
S
r2
I2 I1
S1
S2
Y1 Y2
Imbalance in the goods market
R
Y
IS
ED
ES
I>S
E>Y
I<S
E<Y
I=S
E=Y
R R
I
I
Y
Y
S S
45
I
S
R1
I1
S1
Y1
IS
R2
Y2 I2
S2
IS Curve
S,I
Y Y
R
Y1 Y2
I1
S
Y1
I2
Y2
R1
R2
IS
When Interest Rate=R1,I = I1 IS Curve
When Interest Rate=R2,I = I2
5.2 LM Curve
?Financial Markets Equilibrium
?Money Demand = Money Supply
?LM Curve
?Conditions For Equilibrium,Ms=Md
0s MM ?
hrkyPM
hRkYM
d
d
??
??
/
5.2 LM Curve
? Ms =400 L1=Mt=0.25Y
L2=Ma=250 – 2000R
Md=0.25Y+(250 – 2000R)
? Conditions for Equilibrium,Ms=Md
? LM Curve,400=0.25Y + 250 – 2000R
Y=600 + 8000R
5.2 LM Curve
Y = 600 + 8000 R
LM
0
0, 0 2
0, 0 4
0, 0 6
0, 0 8
0, 1
0, 1 2
0, 1 4
0, 1 6
600 1000 1400 1800
Y
R
Y R
600 0
1000 0.05
1400 0.1
How to draw it?
R
Y
Mt
Ma
LM
Ma
R1
Mt
R2
A2 A1
T1
T2
Y1 Y2
K
O H
Ms=OH=OK
Excess Demand and Excess Supply in
Financial Markets
R
Y
LM
Md=Ms
A (Y,Mt ) C
(Y,M
t )
B
Md>Ms
ES
Md<Ms
ED
Unbalance In Financial
Markets
R
Y
ED
ES
Md>Ms
Md<Ms LM M
d=Ms
R R
Ma Y
Y
Mt
Ma
Mt
R1
A1
T1
Y1
LM R2
Y2 A2
T2
O
H
K
Ms=OH=OK
Mt
Ma
LM Curve
R
M Y
R
Md1
Ms
Y1
Md2
Y2
R1
R2
LM
When GDP=Y1,Md = Md1
When GDP=Y2,Md = Md2
R1
R2
LM Curve
Imbalance in both markets
R
LM
IS
Y
F
G
H
J
Ms Md >
Ms Md >
Ms Md <
Ms Md <
I S >
I S >
I S <
I S <
5.3 The IS-LM Model
? The Goods Market
? C = 100 + 0.8Y
? I = 200 – 400R
Conditions for Equilibrium,
Y = E = C + I
IS Curve,
Y = 1500 – 2000R
?Financial Markets
? Ms = 300
? Mt = 0.2Y Ma = 50 –
100R
Conditions for Equilibrium,
Ms = Md =Mt + Ma
LM Curve,
Y = 1250 + 500R
? The Goods Market,
? C = 100 + 0.75Yd
? I = 300 – 7000R
? G = 525
? T = 20%(Y-100)
IS Curve
? Financial Markets,
? Ms = 800
? Mt = 120 + 0.4Y
? Ma = 240 - 3000r
LM Curve
R = 0.05 （ 5%） Y = 1475
Y = 2350 – 17500R
Y = 1100 + 7500R
5.3 The IS-LM Model
5.3 The IS-LM Model
?The Interaction of Both Markets,
?Financial Markets,
?The Goods Market,
?IS—LM Model,
?The Intersection In IS-LM Model,Equilibrium In Both Markets
Y Y
R
o
r
E
LM
IS
I
II
III
IV
A
B
ra
rb
5.3 The IS-LM Model
1:I<S,Excess Supply of
Goods
2:I>S,Excess Demand
of Goods
1:L<M,Excess Supply
of Money
2:L>M,Excess Demand
of Money
o Y
R
E
LM IS
I
II
III
IV
A
B
C
D
5.3 The IS-LM Model
1:I<S,Excess Supply of
Goods
2:I>S,Excess Demand
of Goods
1:L<M,Excess Supply
of Money
2:L>M,Excess Demand
of Money
?The Movement of IS Curve,
?Influencing Factors,C,S,T,M,I,G X
? The Movement of LM Curve,
?Influencing Factors,M,L1,L2
?The Movement of Both Curves
5.3 The IS-LM Model
r2
E2
E1
IS1
IS2
r1
y1
LM
Y
R
o
r0
IS0
y0
E0 A B
ya
y2
yb
r2
E2
E1
LM1
LM2
r1
A B
ya
y2
yb
E0
LM 0
R
o
r0
IS
y0 Y y1
SLOPE=0,Keynes area,Fiscal policy has effect
0<SLOPE<∞,Middle area,Monetary policy has effect
SLOPE = ∞,Classical area,Monetary policy has effect
?Three Instances of LM,
h
k
S L O P E
h
m
Y
h
k
rLM
：
,??
5.3 The IS-LM Model
Y
R
o
r2
r1 A
B
LM
The Keyen’s area
The Classical area
The Middle area
5.3 The IS-LM Model
Increasing investment leads to the
movement of IS curve (1)
R
Y
S
I
450
IS1 I1
R1
S
R2
I2 I1
S1
S2
Y1 Y2
I2
IS2
I
R
IS1
Y Y1
R1 A
IS2
Y2
B
Increasing investment leads to the
movement of IS Curve (2)
M P SIY 1????
Decreasing saving leads to the
movement of IS Curve(1)
R
Y
S
I
450
IS1 I1
R1
S1
I1
S1
Y1 Y2
IS2
S2
S
R
IS1
Y Y1
R1 A
IS2
Y2
B
M P SIY 1????
Decreasing saving leads to the
movement of IS Curve(2)
Increasing money supply leads to the
movement of LM Curve(1)
R
Y
Mt
Ma
LM1
Ma
R1
Mt
A1
T1
Y1
LM2
Increasing money supply leads to the
movement of LM Curve(2)
R
LM1
Y Y1
R1 A
LM2
B
R LM1
Y Y1
R1
A
LM2
B
Y2
Increasing money supply leads to the
movement of LM Curve(3)
dMY S 1????
Decreasing transactions demand for money
leads to the movement of LM Curve (1)
R
Y
Mt
Ma
LM1
Ma
R1
Mt1
A1
T1
Y1
O
Mt
LM2
Mt2
R LM1
Y Y1
R1 A
LM2
B
Decreasing transactions demand for money
leads to the movement of LM Curve (2)
R
Y
Mt
Ma
LM1
Ma1
R1
Mt1
A1
T1
Y1
O
LM2
Ma2
Ma
Increasing speculative demand for Money
leads to the movement of LM Curve (1)
R
LM1
Y Y1
R1
A
LM2 B
Increasing speculative demand for money
leads to the movement of LM Curve (2)
Increasing Investment (↑I,↑G,↑C)
R
LM
IS1
Y Y1
R1
A
IS2
B
R2
Y2
Increasing Saving (↑S,↑Tax)
R
LM
IS1
Y Y1
R1
A
IS2
B R
2
Y2
Increasing Money Supply (↑MS,↓Md)
R
LM1
IS
Y Y1
R1
A
LM2
B R
2
Y2
Increasing Money Demand (↑Md,↓Ms)
R
LM1
IS
Y Y1
R1
A
LM2
B
R2
Y2
The Slope of IS and MPS
R↓,I↑→↑Y, (ΔY = ΔI /MPS)
Y
Y1
R1
Y2
R2
R
IS1
IS2
Y3
The Slope of IS and the Elasticity of Investment
Y Y1
R1
Y2
R2
R
IS1
IS2
Y3
The Slope of LM and the Income Elasticity of Mt
Y Y1
R1
Y2
R
LM1
LM2
The Slope of LM and the Rate Elasticity of Ma
Y
Y1
R1
Y2
R
LM1
LM2
48
Chapter 5
The End
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90 91 92 93 94 95 96 97 98 99 00