The Structure of the IS-LM Model

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 IS curve
• The IS curve shows combinations interest
rates and levels of output such that planned
spending equals income.

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 The Investment Schedule

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 I = Ī – bi
i= Rate of interest
b= responsiveness of investment
spending to the rate of interest
Ī = autonomous investment spending

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 Derivation of the IS Curve

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 Effect of the Multiplier on the Slope of the IS Curve

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 A Shift in the IS Curve
Caused by a Change in
Autonomous Spending

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 LM curve

• The LM curve shows combinations

of interest rates and levels of output
such that money demand equals
money supply

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 Demand for Real Balances as a Function of the
Interest Rate and Real Income

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• The demand for real balances increases with
the level of real income and decreases with
the interest rates

• L = kY – hi k,h > 0
• The parameters k and h reflect the sensitivity
of the demand for real balances to the level of
income and interest rates

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• The LM schedule , or money market
equilibrium schedule, shows all combinations
of interest rates and levels of income such
that the demand for real balances is equal to
the supply. Along the LM schedule , the
money market in equilibrium
• M/P = kY – hi

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 Derivation of the LM Curve

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 An Increase in the Supply of Money
Shifts the LM Curve to the Right

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 Goods and Money Market Equilibrium

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 An Increase in Autonomous Spending
Shifts the IS Curve to the Right

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 Derivation of the
Aggregate Demand
Schedule

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