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multiplier effect formula
M= 1/(1-MPC)
MPC
marginal propensity to consume
marginal propensity to consume
the fraction of extra income that a household consumes rather than saves
marginal propensity to save
the fraction of extra income that households saves rather than consumes
multiplier effect - all withdrawals formula
M= 1/MPS + MPT + MPM
the effect of a change is fiscal policy
an increase in government spending and a reduction in taxes would both push the IS curve out to the right
the effect of a change in monetary policy
an increase in money supply shifts the LM curve to the right
what causes the a new equilibrium to occur on the IS curve
a fall in the interest rate which raises the the expenditure line
what causes the a new equilibrium to occur on the LM curve
a rise in national income which increases the demand for money
what does the IS and LM curves describe
equilibrium in goods market and money market and together determines the general equilibrium in the economy
IS
investment and saving
LM
liquidity and money
what links the goods and money markets
the rate of interest (i)
when interest rates go down
the level of national income goes down, and investmnet increases because its cheaper to borrow money
IS curve 2 axis
y axis - interest rate, x -axis - national income
every single point on the IS curve
can be traced back to a point of equilibrium in the goods market (keynsian cross)
slope of the IS curve depends on
how responsive consumption and investment expenditures are to changes in interest rates
the more responsive C and I are….
the flatter the IS curve
The IS curve represents
the combinations of interest rates and real GDP at which the goods market is in equilibrium
the LM curve represents
the combinations of interest rates and real GDP at which the money market is in equilibrium
in the IS-LM model a reduction in autonomous expenditure such as gov spending
leads to a leftward shift of the IS curve because lower government spending decreases aggregate demand, leading to a decrease in output at any given interest rate. The LM curve remains unchanged unless there is a corresponding change in monetary policy.
shifts in IS curve
autonomous expenditure, exports, expectations
shifts in IS curve direction
fall in any of the changes - left, rise in changes - right
axis’s for the money market
y- interest rate, x - quantity of money
what will cause the LM curve to shift
if the CB expands or contracts the money supply
rise in money supply effect on LM curve
shift downwards to the right
equilibrium in the economy is found where
the IS curve intersects the LM curve, interest rate Ie and national income level Ye
effect of a change in fiscal policy
shifts the IS curve out to the right/ left
effect of change in monetary policy
shifts LM curve to the right or left ( expansion shifs it to the right
if CB’s want to maintain interest rates following a shift in the Is curve
they must increase the money supply and shift the LM curve to the right
