ECON 2410 Chapter 5: Chapter 5- Goods and Financial Markets The IS-LM Model.pdf
Document Summary
Chapter 5- goods and financial markets: the is-lm. Is relation- an equilibrium condition stating that demand for goods must be equal to the supply of goods, or equivalently that investment must be equal to saving. Is curve- a downward sloping curve relating output to the interest rate. The curve corresponding to the is relation, the equilibrium condition for the goods market. Lm relation- an equilibrium condition stating that the demand for money must be equal to the supply for money; the equilibrium condition for the financial market. Lm curve- an upward sloping curve relating the interest rate to output. The curve corresponding to the lm relation, the equilibrium condition for financial markets. Fiscal contraction- a policy aimed at reducing the budget deficit through a decrease in government spending or an increase in taxation. Fiscal expansion- an increase in government spending or a decrease in taxation, which leads to an increase in the government deficit.