Current Events:
- Interest rates have spiked
- Banks won't even loan to other banks
- Higher unemployment
- Durable goods sag
The Demand for Money Equation:
- The demand for money equation shows the relationship between money demand and income and interest rates
- Md = co + c1Y - c2r
The Supply of Money:
- Controlled by the central bank (Federal Reserve)
- The Fed increases the money supply by purchasing government bonds and decreasing the money supply by selling government bonds
LM Summary:
- Shows equilibrium combination of income and interest rates in financial markets
- Slopes up and to the right
- Flat (steep) when interest elasticity of money demand is high (low)
- Shifts down (up) and to the right (left) with an increase (decrease) in money supply
- Shifts up (down) and to the left (right) when money demand increases (decreases) at given levels of income and interest rates
Equilibrium in Product Markets (The IS Curve):
- The equilibrium combination of income and interest rates that is obtained in financial markets has implications for the performance of the output sector of the economy
- The IS curve describes the combinations of income and interest rates that are consistent with equilibrium in output markets
The Investment Function:
Investment is influenced by two factors:
- Business expectations, that Keynes believed were unrelated to current income
- Interest rates, the amount of investment is inversely related to the interest rate
The investment function with these considerations is given by:
- I = I0 - i1r (i1 >0)
IS Summary:
- Shows equilibrium combination of income and interest rates in product markets
- Slopes down and to the right
- Flat (steep) when interest elasticity of investment demand is high (low)
- Shifts to the right (left) with an increase (decrease) in government spending or investment
- Shifts to the left (right) when there is an increase (decrease) in taxes
- r = [(a-bT+I0+G)/i1]-[(1-b)/i1]Y
Macroeconomic Equilibrium:
- Found by putting LM and IS on the same graph and finding their intercept point
- Interest rates have spiked
- Banks won't even loan to other banks
- Higher unemployment
- Durable goods sag
The Demand for Money Equation:
- The demand for money equation shows the relationship between money demand and income and interest rates
- Md = co + c1Y - c2r
The Supply of Money:
- Controlled by the central bank (Federal Reserve)
- The Fed increases the money supply by purchasing government bonds and decreasing the money supply by selling government bonds
LM Summary:
- Shows equilibrium combination of income and interest rates in financial markets
- Slopes up and to the right
- Flat (steep) when interest elasticity of money demand is high (low)
- Shifts down (up) and to the right (left) with an increase (decrease) in money supply
- Shifts up (down) and to the left (right) when money demand increases (decreases) at given levels of income and interest rates
Equilibrium in Product Markets (The IS Curve):
- The equilibrium combination of income and interest rates that is obtained in financial markets has implications for the performance of the output sector of the economy
- The IS curve describes the combinations of income and interest rates that are consistent with equilibrium in output markets
The Investment Function:
Investment is influenced by two factors:
- Business expectations, that Keynes believed were unrelated to current income
- Interest rates, the amount of investment is inversely related to the interest rate
The investment function with these considerations is given by:
- I = I0 - i1r (i1 >0)
IS Summary:
- Shows equilibrium combination of income and interest rates in product markets
- Slopes down and to the right
- Flat (steep) when interest elasticity of investment demand is high (low)
- Shifts to the right (left) with an increase (decrease) in government spending or investment
- Shifts to the left (right) when there is an increase (decrease) in taxes
- r = [(a-bT+I0+G)/i1]-[(1-b)/i1]Y
Macroeconomic Equilibrium:
- Found by putting LM and IS on the same graph and finding their intercept point
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