Class Slides for EC 204Spring 2006

To Accompany Chapter 10

The Goods Market and the IS Curve

Planned Spending = E = C + I + G

E = C(Y-T) + I + G

Actual Spending = Y

Equilibrium: Actual Spending = Planned Spending

Y = E

The Interest Rate, Investment and the IS Curve

Suppose Investment Spending depends on the interest rate:

I = I(r)

Equilibrium: Y = C(Y-T) + I(r) + G (IS Curve)

Loanable-Funds Interpretation of IS Curve

Y - C - G = I

S = I

Y - C(Y-T) - G = I(r)

S(Y) = I(r)

The Money Market and the LM Curve

Equilibrium in the Money Market:

Real Money Supply = Real Money Demand

M/P = L(r, Y) (LM Curve)

The Short-Run Equilibrium

Y = C(Y-T) + I(r) + G (IS)

M/P = L(r, Y) (LM)