The IS- LM Model Part III

Intersection of IS- LM curves

.At the point of intersection of the IS and Lm curves, the rate of interest and the income are related in such a way that :The goods market is in equilibrium i.e Agg demand= aggregate output.The money market is also in equilibrium i.e. demand for money is in equilibrium with the supply of money.

.The IS- Lm curve analysis has succeeded in synthesizing the monetary and fiscal policies.With the IS-LM curve analysis, we are better able to explain the effect of changes in certain important economic variables such as desire to save, the supply of money, investment, demand for money on the rate of interest and level of income.

.Effect of changes in the supply of money on the rate of interest and income level:When supply of money increases, rate of interest falls and Y increases.When supply of money decreases, the rate of interest increases and Y decreases.

.Changes in the desire to Save or propensity to consume: The increase in mpc moves the AD curve up increasing the national income. This moves the IS curve to the right and moves up the rate of interest at the equilibrium level.

.Changes in autonomous investment and government expenditure:Increases the investment expenditure increasing the agrregate demand. IS curve moves to the right and increases the rate of interest and national income.

.Changes in demand for money or liquidity preference:Affects the LM curve. Increase in money demand moves the LM curve to the left. Thus the equilibrium rate of interest will rise and national income will fall.___________________________