Lecture 10: IS-LM Model Overview

These flashcards cover the key terms and concepts related to the IS-LM model discussed in Lecture 10.

IS-LM Model

A model that explains the relationship between interest rates and real output in the goods and money markets.

IS Curve

Shows combinations of interest rates and income levels consistent with equilibrium in the market for goods and services.

LM Curve

Represents combinations of output and interest rates consistent with equilibrium in the money market.

Marginal Propensity to Consume (MPC)

The amount by which consumption changes when disposable income increases by $1.

Investment Function

Describes how desired investment is a function of interest rates.

Equilibrium

A state in which supply equals demand in both goods and money markets.

Shift of the IS Curve

Caused by changes in consumption (C), investment (I), or government spending (G), other than changes in income (Y) or interest rates (r).

Shift of the LM Curve

Caused by changes in money demand or money supply, excluding changes in output (Y) or interest rates (r).

Money Demand Function

Reflects that money demand increases with output (Y) and decreases with interest rates (r).

Diminishing Returns

The principle that as more capital is added, the marginal productivity of that capital decreases.