goodsandfinancialmarketstogethertheis-lmmodel.pptVIP

Goods andFinancial Markets Together:The IS-LM Model The Goods Marketand the IS Relation Equilibrium in the goods market exists when production, Y, is equal to the demand for goods, Z. In the simple model (in chapter 3), the interest rate did not affect the demand for goods. The equilibrium condition was given by: Investment, Sales (Y), and the Interest Rate (i) Now, we no longer assume I (investment) is constant We capture the effects of two factors affecting investment: The level of sales/income (+) The interest rate (-) The Determination of Output Taking into account the investment relat