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2017 | OriginalPaper | Buchkapitel

14. The IS and LM Curves

verfasst von : Karl Seeley

Erschienen in: Macroeconomics in Ecological Context

Verlag: Springer International Publishing

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Abstract

The IS-LM model is a tool for understanding the effects of monetary and fiscal policy when interest rates are allowed to vary. This chapter derives the IS and LM curves and addresses the factors that determine their shape. For each one, a graphical explanation is followed by an algebraic derivation that allows a quantitative description of how far a curve will move in response to a given change in the economy.

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Vorheriges Kapitel Fiscal Policy

Nächstes Kapitel Policy and Shocks in the IS-LM World

Nur mit Berechtigung zugänglich

An alternative way of explaining this is to see money demand as based on a choice between storing your wealth as money or as non-money assets (simplify by calling those “bonds”), so there are three markets: output, money, and bonds. But equilibrium in the market for money implies equilibrium in the market for bonds, so we can get away with only considering two markets: output and money.

In John R. Hicks’ original formulation in the 1930s (see description in [2]), this was the “goods” market. Changing the terminology to “output” avoids potential confusion in an era when so much of our GDP and employment is linked to services rather than goods.

Interest rates also have a pretty clear effect on consumption. When interest rates go down, it’s more attractive to borrow money to spend on consumption; or, if you have money you were thinking of saving, saving becomes a little less attractive relative to consumption. In either case, a lower interest rate, ceteris paribus, should encourage more consumption. But the effect is in the same direction as with investment (lower interest ⇒ more spending), so bringing it up doesn’t qualitatively change the story.

This particular specification of the demand for money follows [1].

This is a useful simplification. As Chap. 10 explains, the money supply is more subtle than just an exogenously determined quantity.

John R. Hicks, one of the original creators of the IS-LM framework, observed that without uncertainty regarding one’s expectations, there’s little need for liquidity. [2, p. 152]

This distinction is related to the concept of the “money multiplier,” as opposed to the “money-supply” multiplier discussed here. This other sense of “money multiplier” describes a relationship in which bank reserves are multiplied up into money. As pointed out in [3], that’s not how it works.

Froyen, R. T. (2001). Macroeconomics: Theories and policies (7th ed.). Upper Saddle River: Prentice Hall.

Hicks, J. (1980). IS-LM: an explanation. Journal of Post Keynesian Economics, 3, 139–154.CrossRef

McLeay, M. Radia, A. & Thomas, R. (2014). Money creation in the modern economy. Quarterly Bulletin, Q1, 1–14.

Titel: The IS and LM Curves
verfasst von: Karl Seeley
Verlag: Springer International Publishing
Buch: Macroeconomics in Ecological Context
Print ISBN: 978-3-319-51755-1

Electronic ISBN: 978-3-319-51757-5

Copyright-Jahr: 2017
DOI: https://doi.org/10.1007/978-3-319-51757-5_14