Syllabus T. Y. B. A. Paper : IV advanced economic theory with effect from academic year 2010-11 in idol

FIGURE 8.3: SHIFT IN THE IS CURVE 
 
The above diagram shows that a shift in the IS curve is 
caused by a change in autonomous spending ( A) or change in 
investment. As a result, AD curve shift up in upper panel of the 
diagram increasing the income and output form Y
1
to Y
2
. This is 
brought down in lower panel. At i
1
we have two income levels 
namely Y
1
and Y
2
. Therefore the IS curve shift form one levels to 
another. 
The horizontal distance between two IS curve is given by the 
value of Multiplier (K) and size of change in investment ( I). This 
means that higher value of Multiplier, greater will be the distance 
between the IS curves. 
 
 
 
Y
AD
1
A c 1 t Y bi
1
E
2
E
0
1
E
2
E
1
Y
2
Y
0
1
i
2
A
1
A
1
IS
2
IS
Income / Output
Income / Output
ΔY = K *ΔA
InterestRate
AggregateDemand
1
A c 1 t Y bi
ΔA

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Check your Progress: 
1. Define Good Market Equilibrium. 
2. Explain the slope of the IS curve. 
 
8.2.2 The Assets Market and the LM Curve: 
 
 
Assets market is the market in which money and other 
interest earning assets are traded. The total financial wealth of an 
individual is held in the form of real money balance 
M
P
and 
bonds. It implies that when money market is in equilibrium (L = M), 
the bond market is also in equilibrium. Therefore, money market 
equilibrium represents equilibrium of the assets market. 
The money market is in equilibrium when the demand for 
real balance or liquidity preference (L) is equal to the supply of real 
money balance 
M
P
.
Here ‗M‘ is supply of nominal stock of money provided by the 
monetary authority and is assumed to be constant (
M
). The price 
level is also assumed to be constant (
P
). 
Therefore, the supply of real money balance is given as 
M
P
Money Market Equilibrium by equation 
____________ (1) 
Demand for money depends on level of income ‗Y‘ and rate of 
interest ‗i‘. Therefore, 
____________ (2) 
k > 0, h > 0 
Where Y = Income/Output 
i = Rate of Interest 
k= responsiveness of demand for money to change in 
income 
h = responsiveness in liquidity preference to a given change 
in rate of interest