Class notes ECO5 B07

Module - I
IS-LM Model
The IS-LM model was developed by John R Hicks
and Alvin H Hansen. The IS-LM model shows how the
goods(Product) and money market interact to determine
the level of income and the rate of interest. It is a general
equilibrium model because it shows the attainment of
equilibrium simultaneously in both the goods and money
market

, Goods Market Equilibrium Using IS Curve
The goods market is in equilibrium when saving and
investment are equal. The IS curve shows various combinations of
the level of income and the rate of interest that makes
savings(leakages) equal to investment(injections). Thus IS express
the equality of saving and investment which represent the goods
market equilibrium
The condition for equilibrium in the goods market is
Y=C+I
Here consumption(C) is a function of income(Y) and
investment is a function of rate of interest(r)
It can be also represented as
Y=C+S
Therefore, the equilibrium condition is also represented as S = I
Here, Saving(S) is a function of income(Y). So the product
market equilibrium condition can be summarized as
S(Y) = I(r)