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Background

Let’s talk about different markets:

• Market
  • Money
    • Money Demand
    • Money Supply
  • Product
    • GDP
    • National

Classical → money and product market are independent Keynes → there is a relationship

Money supply $\uparrow$ ⇒ Rate of Investment $\downarrow$ ⇒ Investment $\uparrow$ ⇒ Employment $\uparrow$ ⇒ $y\uparrow$ (Money market changes) ⇒ (Product market changes)

Kenny didn’t explain the converse

To explain the reverse someone came up with the IS-LM Framework

ISLM:

• Investment (product)
• Savings (product)
• Liquidity Preference (money)
• M (money)

Point of Static Equilibrium

Aggregate Demand = Aggregate Supply

$$AD=C+I$$ $$AS=C+S$$ $$\begin{array}{rl}\cancel{C}+I& =\cancel{C}+S\\ I& =S\end{array}$$

Transclude of Lecture--ISLM-refresher-2024-09-24-13.50.35.excalidraw

E If the ROI.