The economics of money, banking, and financial markets

CHAPTER 2

The ISLM Model 

1

Keynes’ Fixed Price Level Assumption and the IS Curve ...................................................... 1

The 

LM Curve .......................................................................................................................  1

Equilibrium in the Market for Money: The 

LM Curve ............................................................  2

ISLM Approach to Aggregate Output and Interest Rates ..................................................... 4

Factors That Cause the LM Curve to Shift ................................................................................ 5

Changes in Equilibrium Level of the Interest Rate and Aggregate Output ..................... 7

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Contents in Detail

Response to a Change in Monetary Policy ..............................................................................  7

Response to a Change in Fiscal Policy ....................................................................................  8

APPLICATION

 The Economic Stimulus Act of 2008 ................................................... 9

Effectiveness of Monetary Versus Fiscal Policy ....................................................................  11

Monetary Policy Versus Fiscal Policy: The Case of Complete Crowding Out ........................  11

APPLICATION

  Targeting Money Supply Versus Interest Rates.................................. 13

ISLM Model in the Long Run ....................................................................................................  16

Summary  18   •   Key Terms  19   •   Questions and Applied Problems  17   •    

Web Exercises  19   •   Web References  20