Summary of the ISLM model

1
Summary of the IS-LM model

• How to analyze the effects of policies or events
  by the IS-LM model
• Find how the IS curve and/or the LM curve shift.
• Find how the output (Y) and the real interest
  rate (r) move.
• Find how the investment (I) changes by the change
  in real interest rate (r), and how the
  consumption (C) changes by the change in
  disposable income (Y-T).
• Consumption positively depends on the disposable
  income.
• Investment negatively depends on the real
  interest rate.

2
Summary of the AD-AS model

• How to analyze the effects of policies or events
  by the AD-AS model
• Find how the SRAS curve shifts by the shocks.
• Find how the AD curve shifts.
• Find both the new short-run equilibrium and the
  new long-run equilibrium.
• Tell how the output (Y) and the price level (P)
  move in the short run
• Tell how the output (Y) and the price level (P)
  move in the long run

3
Combination of the IS-LM and the AD-AS model

• How to analyze the effects by the IS-LM and the
  AD-AS model
• Find how the AD curve and/or the SRAS curve
  shift, and find the new SR price level (PSR).
• Find what happens to (Y, r, C, I) in the short
  run by the IS-LM model.
• Find the new LR price level (PLR) by the AD-AS
  model.
• Shift the LM curve until the equilibrium becomes
  YYLR. At this point, PPLR.
• Find what happens to (Y, r, C, I) in the long run
  by the IS-LM model.

4
Shift in the IS curve

• How to derive the shift in IS curve by policies
  or events.
• Pick up a real interest (r) and the output (Y)
  corresponding to the r.
• Think whether C(Y-T)I(r)G increases or
  decreases.
• Find how the planned expenditure (E) shifts in
  the Keynesian cross.
• From the Keynesian cross, find the new output,
  then plot new point (Y, r).
• Find how the IS curve shifts in the IS-LM model.

5
Shift in the LM curve

• How to derive the shift in LM curve by policies
  or events.
• Pick up an output (Y) and the real interest rate
  (r) corresponding to the Y.
• Think whether L(rpe, Y) increases or
  decreases, and find how L shifts.
• Find how the real monetary balances (M/P) shifts.
• Find the new real interest rate, then plot the
  new point (Y, r).
• Find how the LM curve shifts in the IS-LM model.