Goods and

Financial Markets:
The IS-LM Model

Chapter 5
 IS-LM MODEL

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 IS-LM

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 The LM

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 5-1 The Goods Market and the IS
Relation

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 5-1 The Goods Market and the IS
Relation
Figure 5-1 Equilibrium in the Goods Market

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 5-1 The Goods
Market and the IS
Relation
Figure 5-2 The Derivation
of the IS Curve

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 5-1 The Goods Market and the IS
Relation
Figure 5-3 Shifts of the IS Curve

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 5-2 Financial Markets and the LM
Relation

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 5-2 Financial Markets and the LM
Relation
Figure 5-4 The Derivation of the LM Curve

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 5-2 Financial Markets and the LM
Relation
Figure 5-5 Shifts of the LM Curve

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 5-3 Putting the IS and the LM
Relations Together
Figure 5-6 The IS–LM Model

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 5-3 Putting the IS and the LM
Relations Together
Figure 5-7A The Effects of an Increase in Taxes (cont.)

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 5-3 Putting the IS and the LM
Relations Together
Figure 5-7B The Effects of an Increase in Taxes (cont.)

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 5-3 Putting the IS and the LM
Relations Together
Figure 5-7C The Effects of an Increase in Taxes

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 5-3 Putting the IS and the LM
Relations Together
Figure 5-8 The Effects of a Monetary Expansion

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 5-3 Putting the IS and the LM
Relations Together
Table 5-1 The Effects of Fiscal and Monetary Policy

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 Focus: The U.S. Recession of 2001
Figure 1 The U.S. Growth Rate, 1999–1 to 2002–4 (NEGATIVE
GROWTH 2001.1 AND 2001.2)

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 Focus: The U.S. Recession of 2001
Figure 2 The Federal Funds Rate, 1999–1 to 2002–4
(EXPANSIONARY MONETARY POLICY IN THE SHADED AREA)

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 Focus: The U.S. Recession of 2001
Figure 3 U.S. Federal Government Revenues and Spending (as
Ratios to GDP), 1999–1 to 2002–4 (Expansionary fiscal policy in
the same period lower taxes)

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 Focus: The U.S. Recession of 2001

Figure 4 The U.S. Recession

of 2001

IS down to IS’’ due to lower

investment
LM to LM’ expansionary monetary
policy

IS to IS’ due due to fiscal expansion

Lower output offset by expansionary

fiscal and monetary policies

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 5-5 How Does the IS-LM Model Fit
the Facts?
Figure 5-9 The
Empirical Effects
of an Increase
in the Federal
Funds Rate
(cont.)

Shows
1) How long it
takes for
max effect.
2) IS-LM fits
reality

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 5-5 How Does the IS-LM Model Fit
the Facts?
Figure 5-9
The Empirical
Effects of an
Increase in the
Federal Funds
Rate

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 Appendix: An Alternative Derivation of the LM
Relation as an Interest Rate Rule
Figure 1 The LM Relation as an Interest Rate Rule

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