MGEB06H3 Chapter Notes -Ceteris Paribus, Real Interest Rate, Keynesian Cross
13 Oct 2013
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Review of is/lm model (chapters 10 & 11) Curve shows all of the (y,r) pairs that support (lead to) equilibrium in the goods and. Services market. ( i. e. ys = yd . Curve shows all of the (y,r) pairs that support (lead to) equilibrium in the money (asset) market. ( i. e. ms = md . Short-run (sr) equilibrium output (y*sr) is determined by equating planned expenditure (e = yd) to actual expenditure (y = ys. Sr) given among other things fiscal policy (i. e. g & t) and the real interest rate (thus i is fixed). The real interest rate varies to determine equilibrium in the money/assets market. Given output (y); the money supply (ms); the aggregate or average price level (p); and the real money demand curve l(y,r). In essence, the is curve combines the interaction between r and i expressed by the investment function and the interaction between i and y demonstrated by the.
