Answer to Question #126584 in Macroeconomics for CAROL

Question

 Define the IS curve and LM Curve. Discuss at least three characteristics of each of these curves

Answer 1

Define the IS curve and LM Curve

An IS curve shows the set of all levels of interest rates and the output, which in this case is the Gross Domestic Product (GDP), at which Total Investment (I) is equal to total saving (S). As depicted and postulated by scholars in economics, when interest rates are low, investments are high, and vice versa is true. An LM curve is a curve depicting a set of all levels of income, which is the GDP and the attributed interest rates at which the money supply is equal to money demand and liquidity.

Characteristics of an IS curve

The following are the characteristics of an IS curve;

• The IS curve is only shifted by changes attributed to autonomous spending
• The IS curve always negatively slopes since an increase in the interest rates leads to a decrease in planned investment planning. Therefore, this effect reduces the aggregate demand, which also lowers the equilibrium level of expected incomes.
• Thirdly, the IS curve is a financial accounting curve showing a combination of the interest rate and the level of income such that good in the market is at equilibrium.
• Points to the right on the IS curve depict excess supply of goods in a market while points to the left depict excess demand for the said goods.

Characteristics of an LM curve

Listed below are characteristics of an LM curve, and they include;

• The LM curve is always positively sloped, which depicts that an increase in the interest rates leads to a decrease in the money supply and vice versa.
• The money supply is held constant along the LM curve since a change in the money supply will shift the LM curve. If the amount of money in circulation increases or decreases, it will lead to a shift in the LM curve.
• Lastly, points above and to the right of the LM curve depict excess demand for money while points below and to the left of the curve depict low demand for money.

All in all, IS and LM curves have successfully been used by organizations to make marketing decisions for their goods.