In the IS LM model discuss the effects of expasionary monetary policy, making clear the mechaisms through...

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Economics

Inthe IS LM model discuss the effects of expasionary monetary policy,making clear the mechaisms through which monetary policyoperates

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The ISLM model is the basic modelof aggregate demand that incorporates the money market as well asthe goods market It lays particular stress on the channels throughwhich monetary and fiscal policy affect the economy The ISLMmodel is a standard tool of macroeconomic that demonstrates therelationship between interest rates and real output in the goodsand services market and the money market The intersection of theIS and LM curves is the General Equilibrium where there issimultaneous equilibrium in both marketsEQUILIBRIUM IN A CLOSEDECONOMYThe general equilibrium model of theeconomy comprises of the two parts The first part brings togetherthe determinants of equilibrium in the real sector or the goodsmarket of the economy The second part brings together thedeterminants of equilibrium in the money market or the monetarysector of the economy The equilibrium in the real sector isdefined in terms of the equality between the aggregate saving andaggregate investment corresponding to that aggregate real incomewhere aggregate saving equals the aggregate Investment SI theaggregate demand for goods just equals the aggregate supply ofgoods in the economy ie CIY thus the economys real sector isin equilibrium at this level of aggregate real income Theequilibrium of the economys money market requires equality betweenthe total supply of money and the total demand for money Theequality between the total supply of and demand for money furnishesus with the equilibrium rate of interest Thus the monetary sectorof the economy will be in equilibrium at that rate of interestcorresponding to which the total demand for money equals the totalsupply of money ie where MdMsThe equilibrium aggregate incomecorresponding to which See Answer

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