Macroeconomics: Theory and Policy

16

The IS–LM Model for a Two Sector Economy

After studying this topic, you should be able to understand

• The IS curve represents the goods market equilibrium.
• The LM curve represents the money market equilibrium.
• The simultaneous equilibrium in the goods and money markets exists where the IS curve intersects the LM curve.
• At all points, other than the point where the IS and LM curves intersect, there will exist disequilibrium.
• The equilibrium is disturbed due to a shift in the IS or LM curves.

INTRODUCTION

This chapter is a synthesis of the theory of income and output and the theory of money and interest. It analyses the linkages and the interactions between the goods and money markets to determine that level of income and the interest rate ...