Page 152 - DECO201_MACRO_ECONOMICS_ENGLISH

Hitesh Jhanji, Lovely Professional University
Unit 9: General Equilibrium of an Economy: IS-LM Analysis

Unit 9: General Equilibrium of an Economy: Notes
IS-LM Analysis

CONTENTS
Objectives

Introduction
9.1 The Two Market Equilibrium
9.2 The Product Market Equilibrium – The IS-curve
9.2.1 Derivation of the IS-curve

9.2.2 Properties of the IS-curve
9.3 Money Market Equilibrium – LM-curve
9.3.1 Derivation of LM-curve
9.3.2 Properties of LM-curve

9.4 Macro Economic General Equilibrium
9.4.1 Changes in the Equilibrium Level of Income and Interest Rate
9.4.2 Adjustment towards Equilibrium
9.4.3 IS-LM Analysis

9.5 Summary
9.6 Keywords
9.7 Review Questions
9.8 Further Readings

Objectives

After studying this unit, you will be able to:
Describe the IS-curve;
State the properties of IS-curve;
Explain the LM-curve;

State the IS-LM Analysis
Discuss the general equilibrium

Introduction

In this unit, you are going to about the IS-LM model. In IS, I and S are short forms of investment
and saving but represent more than these. You have learnt that in case of a closed economy
without government, national output or real GDP is determined where investment equals
saving. In both cases the equilibrium is where injections into the spending stream equals leakages
from the spending stream. In the IS function thus the world I stands for injections and the word
S for ‘leakages’. IS stands for equality of injections and leakages.

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