Bob concept of is-lm model

See example ... synonym dictionary
Model-a large-scale topic sample reflecting the structure and operation of an object or its parts [terminological dictionary for construction in 12 languages (USSR VNIIIS Gosstroy)] model system, process, IT service, expression of the configuration unit ... manual for a technical translator
- (model) a simplified system used to simulate certain aspects of real economy. Economic theory is forced to use simplified models: the real world economy is so large and complex that it is simply impossible..... Economic dictionary
- (French modele, Latin modulus measure, pattern, norm), defined similarly in the logic and methodology of science (scheme, structure, sign system). A fragment of natural or social reality, human creativity. Culture, conceptual theory..... philosophical encyclopedia
An abstract or real image of objects or processes corresponding to the objects (processes) being studied according to some given criterion. For example, a mathematical model of layer accumulation (abstract process model), a block diagram ... Geological encyclopedia
(Is LM model) is a model often used only as a simple example of general equilibrium in macroeconomics. The IS curve shows a combination of National Income Y and interest rate R.
Unlike the gross demand and gross supply model this model has fixed price levels and wages. For this reason, the growth of commodity material reserves will be a determining factor in achieving macroeconomic balance in the short term. An active public policy that regulates total demand is necessary to prevent possible losses as a result of reduced production. That is why Keynes's economic theory is in many cases referred to as the theory of total demand. The change in total demand components, especially investments, is one of the reasons for macroeconomic instability. A balanced level of prices means a price level such that gross demand and supply volume must overlap or equal. First of all, let's consider whether the gross demand curve and the gross supply curve correspond in the intermediate cross section. The balanced level of prices and the balanced levels of the National volume of production are determined by Res and yes, respectively. So that we can show why Re represents a balanced level of prices and a balanced level of Ye national production, we consider that the balanced level of prices is not Re, but R1. In a situation where the price level is R1, enterprises do not increase the volume of national production from the amount of Y1. Consumers are willing to buy products at Y2 when the price level is R1. Due to being AD>AS, consumer competition pushes price levels up to Re. The rise in price levels from R1 to Re leads to an increase in production from Y1 to Ye and a decrease in consumer demand from Y2 to Ye. And these ad, AS straight lines intersect at point E. So it is precisely Re price that is a balanced level of prices and e is a point of balance. In drawing 4, the gross demand curve intersects the gross supply curve in the Keynes cut. In this situation, the price level does not matter. To understand this, we first define the balanced volume of national production with Ye and the balanced price level with Re.
Unlike the gross demand and gross supply model this model has fixed price levels and wages. For this reason, the growth of commodity material reserves will be a determining factor in achieving macroeconomic balance in the short term. An active public policy that regulates total demand is necessary to prevent possible losses as a result of reduced production. That is why Keynes's economic theory is in many cases referred to as the theory of total demand. The change in total demand components, especially investments, is one of the reasons for macroeconomic instability. A balanced level of prices means a price level such that gross demand and supply volume must overlap or equal. First of all, let's consider whether the gross demand curve and the gross supply curve correspond in the intermediate cross section. The balanced level of prices and the balanced levels of the National volume of production are determined by Res and yes, respectively. So that we can show why Re represents a balanced level of prices and a balanced level of Ye national production, we consider that the balanced level of prices is not Re, but R1. In a situation where the price level is R1, enterprises do not increase the volume of national production from the amount of Y1. Consumers are willing to buy products at Y2 when the price level is R1. Due to being AD>AS, consumer competition pushes price levels up to Re. The rise in price levels from R1 to Re leads to an increase in production from Y1 to Ye and a decrease in consumer demand from Y2 to Ye. And these ad, AS straight lines intersect at point E. So it is precisely Re price that is a balanced level of prices and e is a point of balance.
The classics and early neoclassicists did not see problems in converting savings into investments, and they believed that money only serves transactions with goods and services. Therefore, these aspects are not reflected in the MODEL AD-AS, which is the aggregate demand and proposals aimed at equilibrium.
The first part of the model (IS) is designed to reflect the equilibrium conditions in the market of goods (in the macroeconomic sense, that is, the market of all goods), the second (LM) is money in the market... Both markets are interconnected: changes in the Commodity Market cause certain shifts in the money market, and vice versa. This model simplifies the picture a little: a short period is assumed, prices and money supply remain unchanged, under the conditions, the balance in the commodity market is ensured s \u003d I, and in the money market - it is presented l \u003d M.
Form. 2.3, a curve is describes the ratio of rate percentage (D) and national income level ( Y), which provides a balance in the commodity market. Savings ( S ) and investments (I ) depend on the level of income and interest rate. The curve IS has a negative tendency because investments are inversely related to the interest rate, i.e. with a decrease in interest, investments will grow. Accordingly, income will increase ( Y ) and savings will grow (S), and in order to stimulate transformation, I will have to continue to reduce the interest rate. Thus, the investment is a function of the interest rate, the savings is a function of the national income, and the balance of savings and Investments is achieved with different combinations of the interest rate and the national income level.
Figure: 2.3. Linearis (a) vaLM (b
The curve LM (figure 2.3, B) represents the balance of supply and demand for money market funds. The cash and settlement account (liquidity) requirements of economic agents increase with an increase in Income ( Y ), but at the same time the interest rate rises ( r ), that is, the price of money rises due to an increase in demand for them. At a higher interest rate, economic agents prefer not to cash liquidity, and bank deposits and expensive valuation papers... This bends the curve. LM up. If the interest rate falls, then the demand for liquidity increases. Thus, the balance in the money market (L = M) is also achieved in various combinations of interest rates and national income levels.
In each of the two markets, balance - the market for goods and the money market are established not autonomously, but in interdependence. Changes in one of the markets always lead to corresponding changes in the other. The point of intersection is and LM satisfy the double equilibrium condition: first, the equilibrium of savings (5) and investments (I); second, the equilibrium of demand for cash ( L ) and their supply ( M ). The" double " equilibrium is set at Point E 0 when IS crosses LM (figure 2.4).

2.4.
Let's say investment prospects are improving, and the interest rate remains the same. Then entrepreneurs expand capital investments into the production of national income. As a result, the national income increases due to the multiplier effect. With an increase in income, feedback works. There will be a lack of funds in the money market, and the balance in this market will be broken. The demand for participants increases economic activity for money. As a result, the interest rate rises. The double balance point will be E 1.
The interaction process of the two markets does not end there. A high interest rate "slows down" investment activity. Now at the equilibrium point E at the intersection of curves 2 IS 1 and LM 1.
Thus, the balance in the commodity and money markets is simultaneously determined by the interest rate (r) and the national income level ( Y ). For example, equity between savings and investment can be expressed as: S (Y ) = I (f), equity between liquidity and money L (Y) \u003d M (R). In this case, the balance of regulatory instruments ( r and Y ) is interconnected in both markets and is formed at the same time. When the interaction process between the two markets is complete, a new level is set r and Y .
The Model was acclaimed by IS – LM Keynes and became very popular. This model represents the concretization of the Keynesian interpretation of functional relations in the commodity and money market. This helps to reflect the functional dependencies and influence in these markets in economic policy on economics. Interestingly, the Hicks-Hansen model is used by adherents of both neo-Keynesian and neoclassical orientation. With this, neoclassical synthesis is achieved.
The conclusion from the model can be as follows: if the money supply decreases, then the terms of the loan are strengthened, the interest rate rises.
As a result, the demand for money decreases slightly. Part of the money is spent on the purchase of more profitable assets. The balance of demand for money and their supply is broken, then it is set at a new point. Here the interest rate will be higher and the money in the handling area will be less. In such conditions, the central bank changes its policy: the money supply increases, the interest rate decreases, i.e. the process is in the opposite direction.
Commodity and money markets are interconnected. This makes it possible to determine the conditions under which equilibrium occurs in both markets at the same time. In the Model Mil-AS and models Keynesian cross the market interest rate is an external (exogenous) variable and is set relatively independently of the balance of the commodity market in the money market.
The IS curve (investment savings) describes the balance in the commodity sector of the economy. This curve combines many points that are combinations of the interest rate and the real rate of return Y, in which the market for goods is in equilibrium.
Note that in the case of vertical LM, fiscal expansion results in a compressive effect, as opposed to partial compression when the LM has a normal positive slope. Although the amount of gross demand remains unchanged, its composition is radically changing. Currently, the increase in government spending is equivalent to the overall decline in private consumption and investment.
In the IS-LM model, the change in money mass affects the equilibrium level of national income. However, Keynes ' followers noted that this effect is sometimes negligible, such as interest rates being minimized. Under these conditions, the demand for money is infinitely elastic with respect to the interest rate, which means that the balance in the money market is achieved at the single value of the interest rate. An extraordinary low interest rate leads the population to believe that banks are not willing to buy bonds, assuming that the possible costs of saving money are too low, but they prefer to raise money no matter what. In this case, the money demand curve is parallel to the abscissa, i.e. the LM curve is horizontal. Therefore, in this case, the change in the money supply does not change the actual national income. This condition is called a liquid trap, as shown in Figure 14.13. This was mentioned by early followers of Keynes when they debated the ineffectiveness of monetary policy. In such cases, fiscal policy has a major impact on aggregate demand and monetary policy has no effect, as the interest rate is fixed and cannot fall as a result of monetary expansion.
The third case occurs when the demand for consumption and investment is not flexible: it means indifference to the C and I interest rates. In this case, the IS curve is vertical, since it does not depend on the change in the interest rate. A condition in which investments do not respond to changes in the interest rate is called an investment trap. Figure 14.14 shows that tax policy has a strong impact on aggregate demand, but monetary policy does not affect aggregate demand at all.
It is important to note that fiscal policy is fully functional, meaning that there will be no compression effect even when the IS curve is vertical and the LM curve is horizontal. However, the reasons for this are different in any case. In the presence of a" liquid trap", the interest rate does not change, since the balance in the money market is achieved at a single level. Thus, fiscal expansion does not lead to an increase in the interest rate and there is no compression effect. Conversely, if the IS curve is vertical, interest rates will rise, but private spending - consumption and investment-will not decrease in response to an increase in the interest rate.
ModelIS-LM and curve mile
The ad curve reflects the relationship between price levels and incomes in the economy. This relationship arises from the quantitative theory of money. With a constant volume of money Mass, an increase in the price level leads to a decrease in income. The increase in the money mass shifts the ad curve to the right, and the decrease in the money mass shifts the ad curve to the left.
Now, to obtain the ad curve, we use the IS-LM model, not the quantitative theory of money. First, the IS-LM model is needed to show that national income decreases as price levels increase; and to construct a gross demand curve that reflects this relationship with negative inclination. Secondly, it is necessary to study the causes of displacement of the ad curve.Why does the ad curve have a negative slope? To answer this question, let's look at what happens to the IS-LM model when the price level begins to change. Figure 14.15 reflects the effect of variable prices.
The higher price of M for a particular money supply reduces the real money mass of P / M. The decrease in the money mass in the real form shifts the LM curve up and left and reduces the equilibrium level of the form. Here we see that when the price level rises from P1 to P2, The YaMM falls from Y1 to Y2. When the LM curve changes, a change in the price level leads to a change in income values. Form ad curve. Reflects the inverse relationship between national income levels and price levels obtained using the IS-LM model.i LM (P \u003d P2) P
LM (P \u003d P1)

P2