What is the IS-LM FE model?

This name originates from its basic equilibrium conditions: – investment, I, must equal saving, S; – money demanded, L, must equal money supplied, M. The equilibrium in labour market is represented by full employment line, FE.

IS-LM model a tool?

The IS–LM model, or Hicks–Hansen model, is a two-dimensional macroeconomic tool that shows the relationship between interest rates and assets market (also known as real output in goods and services market plus money market).

IS-LM model formula?

Algebraically, we have an equation for the LM curve: r = (1/L 2) [L 0 + L 1Y – M/P]. r = (1/L 2) [L 0 + L 1 m(e 0-e 1r) – M/P].

Is-LM classical model?

In the classical model, money is neutral. An increase in the money supply raises the overall price level by the same percentage, with no effect on real variables—real quantities and relative prices. Consider the IS-LM model of an economy at full employment (point A in figure 2).

What shifts the FE line?

The FE line shifts to the right if there is an increase in labor supply or the capital stock or if there is a beneficial supply shock. 2. The IS curve shows combinations of the real interest rate (r) and output (Y) that leave the goods market in equilibrium.

Is-LM a maker?

The IS-LM model was first introduced by John Hicks in 1937.

IS-LM model assumption?

Movements in output are largely driven by movements in aggregate demand. Output on the supply side is assumed to be infinitely elastic. The aggregate supply curve in the economy is flat, so that the price level can be taken as constant at a predetermined level. .

What are the characteristics of LM curve?

Properties of the LM Curve: Summary: (ii) The LM curve slopes upward to the right. (iii) The slope of the LM curve depends on the interest elasticity of money demand. The LM curve will be (flat) steep if the interest-elasticity of money demand is relatively (low) high.

IS-LM model macroeconomics?

The IS-LM model, which stands for “investment-savings” (IS) and “liquidity preference-money supply” (LM) is a Keynesian macroeconomic model that shows how the market for economic goods (IS) interacts with the loanable funds market (LM) or money market.

Is-LM monetary policy?

Monetary policy is more effective if the LM curve is steeper. A steeper LM curve means that the demand for money is less interest elastic. The less interest elastic is the demand for money, the larger is the fall in interest rate when the money supply is increased.

IS-LM model exogenous variables?

The three critical exogenous, i.e. external, variables in the IS-LM model are liquidity, investment, and consumption. According to the theory, liquidity is determined by the size and velocity of the money supply.