Relationship between the IS-LM model
We have seen in previous lessons that:
The IS model represents the different levels
of income and interest rates and shows the goods and services
market in equilibrium.
The LM model represents the different levels
of income and interest rates and shows the money market in equilibrium.
We now know (well I hope so) that the interest
rate interrelates both markets:
The interest rate is determined in the
monetary market and it directly effects the volume of investment
and therefore the demand of goods.
If we represent both curves, the crossing point
determines the income and interest rate that ensure not only the
goods and services market but also the money market is in equilibrium.
Well guys, how was that?
what? easy, eh? Well lets move onto the next lesson (women and
children first).
