# Econ 202 by lanyuehua

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```									Econ 202: Chapter 10: Aggregate Demand I: Building the IS-LM Model: Study
Guide

Vocabulary:

1.) IS-LM model-A simple model of income determination, based on the ideas in
Keynes’s General Theory, which shows how changes in spending can have a
multiplied effect on aggregate income.
2.) IS curve- The negative relationship between the interest rate and the level of
income that arises in the market for goods and services.
3.) LM curve- The positive relationship between the interest rate and the level of
income (while holding the price level fixed) that arises in the market for money
balances.
4.) Keynesian Cross- A simple model of income determination, based on the ideas
in Keynes’s General Theory; a model based on the assumption that wages and
prices do not adjust to clear markets and the aggregate demand determines the
economy’s output and employment.
5.) Government-Purchases multiplier- The change in aggregate income resulting
from a one-dollar change in government purchases.
6.) Tax Multiplier- The change in aggregate income resulting from a one-dollar
change in taxes.
7.) Theory of Liquidity Preferences- A simple model of the interest rate, based on
the ideas in Keynes’s General Theory, which says that interest rate adjusts to
equilibrate the supply and demand for real money balances.
8.) MPC(Marginal Propensity to Consume)- The increase in consumption resulting
from a one dollar increase in disposable income.

The Effects of Fiscal Policy on the IS curve

 If there is a increase in G or a decrease in T the IS curve shifts to the right
 If there is a decrease in G or a increase in T the IS curve shifts to the left
*The IS curve has a negative slope due to the fact that as r increases I decreases as
a result Y falls.

Loanable-Funds Interpretation of the IS Curve

Y - C(Y - T) – G = I(r)
S=I
The LM Curve

   If there is a increase in the supply of real money balances the LM curve
shifts downward.
   If there is a decrease in the supply of real money balances the LM curve
shifts upward.

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