Francesco Capozzo Stefania Mazzone Deborah Pistorio

Computer Science and Simulation for Economics

Project work on

"IS-LM model."


The applet requires Java 1.4.1 or higher. It will not run on Windows 95 or Mac OS 8 or 9. Mac users must have OS X 10.2.6 or higher and use a browser that supports Java 1.4. (Safari works, IE does not. Mac OS X comes with Safari. Open Safari and set it as your default web browser under Safari/Preferences/General.) On other operating systems, you may obtain the latest Java plugin from Sun's Java site.

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view/download model file: is-lm_model.nlogo


The model simulates the interaction between consumers, enterprises, the Government and the Central Bank in the short term. Consumers are divided into the employed and the unemployed. We assume that the Government lets the tax rate to be constant and changes only the amount of public expenditure. The Central Bank instead controls directly the money supply.

In this model we can analyse the consequences generated by a variation of the public expenditure on the consumption of the employeed and on the investments of the enterprises but also on the interest rate.


A variation of the public expenditure varies the income of both the employed and the enterprises.

The income of the unemployed is null so they consume only the amount Cu0 whereas the employed consume Ce0 + C1*(1-tax rate)*incomeE: consequently a variation of the income of the employed produces a variation of the consumption that depends only on the parameter C1. An increase of the income generates an increase of the consumption instead a decrease of the income generates a decrease of the consumption.

The enterprises raises the level of their investments when their income increases whereas when their income decreases they set investments equal to zero. Moreover the level of investments is in inverse proportion to the interest rate.

In addition, if the income rises (so the production too), the enterprises have to engage new workers to face up to the growth of the production: because of this, a fraction of the unemployed become employed. An opposite situation occurs if the income of the enterprises falls following a reduction of the public expenditure.

Finally, a variation of the public expenditure and, consequently, of the income of the enterprises, produces a variation of the salary, and so of the income, of the employed generating in this way a variation of the consumption and so of the income, of the investment and so on.

But a variation of the public expenditure has consequences also in the financial markets. In fact when income varies also the money demand varies but the money supply doesn't change so the interest rate varies too. Because of this there is a variation in the amount of investments in the opposite direction. Thanks to the appropriate switch we can also decide if the level of investments changes when the interest rate does not.

A variation in the amount of investment generates a variation of the income and so of the consumption, of the investments of the enterprises, of the composition of the workforce, of the salary of the employed, of the consumption and so on.


The observer can decide the level of 5 parameters using the sliders:

- the number of consumers
- the unemployment rate
- the public expenditure variation rate which represents the percentage variation of the public expenditure realized by the Government. In this way the Government always carries out a variation of the public expenditure but it is the observer who decides its amount
- the total money-supply decided by the Central Bank in its monetary policy
- K that represents the deviation from the mean, useful for the
computation of the income of each employee.

There are also 5 buttons in order to start the instructions:

- to setup
- to work
- to change public expenditure
- to go
- to continue

There is a switch "Sensitivity" that allows the observer to decide if investments may change (On) or not (Off) if the interest rate does not change.

Finally there are 3 monitors.
The first one is related to the variable M. This variable is the ratio of the total variation of the income and of the sum of the total variation of the consumption and of the investment. If it is greater than 1 then the income varies more than proportionally in comparison with the sum of the variation of the consumption and of the investment because of the effect of the multiplier.
The second one shows the level of the equilibrium interest rate, that is the interest rate such that the total money supply (here fixed by using the slider) is equal to the total money demand.
The last monitor shows the interest rate variation during the different cycles.

We can observe the variation occured to the income, to the consumption, to the investment and to the interest rate following a variation of the public expenditure and of the income in the related graphs.


The observer can analyse the effect of a variation in the public expenditure variation rate, in the level of the total supply and of the parameter K above all on the level of the interest rate and of the parameter M. Instead when we set the switch "Sensitivity" on, the effect is more evident on the level of the investments.


Try to change the total supply and the public-expenditure-variation-rate: what happens to the equilibrium interest rate? And what happens if you introduce the sensitivity of investments by using the switch?


It could be interesting to introduce another agent, the banks, in order to analyse in a better way the financial markets: in fact in this way consumers can allocate money also on deposits in an amount that depends proportionally on the level of the interest rate.


BLANCHARD, a cura di GIAVAZZI, AMIGHINI (2006), Macroeconomia, ed. Il Mulino, Bologna.