Investment Savings and Liquidity Money

ISEdit

The IS curve is a set of points, dervived in the Goods Market (see also Keynesian Cross) which are the result of a changing interest rate, holding government spending and next exports constant. A less elastic IS means that monetary policy is less effective. In the extreme case of perfect inelasticity only Fiscal Policy could cause a temporary change in output.

LMEdit

The LM curve is a set of points from the Money Market for a given demand for money (liquidity preferences) and a supply of money. The two determining factors are the interest rate on bonds and the quantity of money. The points reflect given income and interest rates on horizontal and vertical axix respectively. The key to the elasticity of LM is the interest elasticity of money. The more responsive money demand is to the interest rate, the more elastic is the LM curve. The LM curve holds constant price-level, expectations, and Money Supply.

Classical LMEdit

Perfectly vertical corresponding to an area of the money demand function where the change in interest rate does not change the demand for money (the upper vertical part of the money demand). With an LM structure like this, changes in the real money supply are effective, but the extent to which this is anticipated limits the effect. With this assumption Fiscal policy will only succeed in changeing the interest rate and will have zero effect on output. This does not seem to be emirically viable in the short-run, but the classical bias was in favor of the long-run anyho

ISLM is the growth theory model through which it helpz us to know how 2 confort in 2days world

See Also Edit

Monetary Policy and Fiscal Policy