The Fundamentals of Money and Financial Systems

CHAPTER 11

Equilibrium in the Goods Market: IS Model

Introduction

It might seem strange to have a chapter on equilibrium in the goods market in a text on money. Money, however, would not have been necessary if there were not a goods market, and speaking of equilibrium in the money market without discussing what it would take for equilibrium in the goods market would be meaningless. The foundations of the quantity theory were implicitly based on equilibrium in both the goods and money markets. Equilibrium in the goods market means that the money market must also be in equilibrium. Departures from equilibrium in either market would disturb the entire economy and would cause changes in both the goods and money markets. In stable economies, such ...