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Is IS/LM chart showing the same thing as the AS/AD chart? How is IS/LM related to...

Is IS/LM chart showing the same thing as the AS/AD chart? How is IS/LM related to AD & AS?

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Answer #1

No,IS/LM shows the relationship between interest rate and output and equilibrium in goods and money market respectively.AD/AS shows relationship between price level and output/employment in an economy.

IS/LM are related to AD/AS because changes in IS/LM changes AD.Suppose IS shifts to the right due to fiscal expansion like lower taxes or higher transfer payments.This increases the purchasing power of the people. Higher purchasing power means higher AD.Similarly if LM shifts to the right due to greater money supply, the interest rate falls. Lower interest rate means lower cost of borrowing which means higher AD.

The opposite happens in cases of fiscal or monetary contraction.

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