ISLM_Appendix.pdf makro ekonomi makro ekonomi

is lm

1. Appendix to Chapter 1: Algebra of the IS LM Model
1. Basic Closed-Economy IS LM Model
We start with a simple closed economy (no foreign trade):
Goods Market (IS side):
Y = C + I + G
C = C € + c(Y - T)
I = I € - b·i
Money Market (LM side):
(M/P) = kY - h·i
2. IS and LM Curves
IS Curve (goods market): Y = ± - ²·i
LM Curve (money market): i = (k/h)·Y - (M/hP)
3. Solution of the Model
Solving simultaneously gives equilibrium output and interest rate:
Y* = (± + (²/hP)·M) / (1 + (²k/h))
i* = (k/h)·Y* - (M/hP)
4. Implications
" Fiscal policy (!‘G or !“T): Shifts IS right !’ higher Y*, higher i*
" Monetary policy (!‘M/P): Shifts LM right !’ higher Y*, lower i*
" Interaction: Crowding-out occurs when fiscal expansion raises interest rates, partially offsetting investment.
5. Open-Economy IS LM Model (Mundell Fleming)
Including net exports (NX):
Y = C + I + G + NX
NX = X - mY - ³·µ
IS (open economy): Y = ±' - ²·i + ´·µ
LM curve remains: i = (k/h)·Y - (M/hP)
6. Implications
" Fixed exchange rate: Monetary policy ineffective, fiscal policy effective.
" Flexible exchange rate: Monetary policy effective, fiscal policy weaker.
" Policy trilemma: Cannot simultaneously have free capital mobility, fixed exchange rate, and independent
monetary policy.