ECO1017 - Keynes, IS-LM, Multiplier, Accelerator and AD

What does the IS curve show?

The IS (investment-saving) curve shows all points of equilibrium in the goods market at a particular interest rate and level of national income.

What policies and shift the IS and LM curves?

Fiscal policy and monetary policy

When does Equilibrium occur with IS and LM?

General equilibrium occurs where the IS curve intersects the LM curve. At this interest rate and level of national income both the goods market and money market are in equilibrium.

What does the LM curve show?

The LM (liquidity-money supply) curve shows points where the money market is in equilibrium at particular rates of interest and level of national income.

What does the Aggregate Demand Curve Show?

The aggregate demand curve plots the relationship between national income and the price level.

What is the formula for the multiplier?

The formula for the multiplier is: Multiplier = 1/(1 - MPC)

Define the Multiplier Effect

The multiplier effect refers to the additional shifts in aggregate demand that result when expansionary fiscal policy increases income and thereby increases consumer spending.