Consider the following IS-LM model:
Goods Market C=200 +.25Yd I=150 +.25Y-1000r
Money Market Md=2Y-8000r Ms=1600
a. Derive the IS Relation. (You want an equation with Y on the left side and all else on the right.)
b. Derive LM relation. (It will be convenient for later purposes to have r on the left side, and all else on the right.)
Solve the system for equilibrium real output. (Substitute the expressions for the interest rate(r)given by the LM relation into the IS equation and solve for equilibrium output (Y).)
a. Because we plot interest rates on the vertical axis, we derive the IS function in terms of the familiar equation-of-a-line formula, y = b + mx.
If Y = C + I+ G
Where C = 200+.25Yd and Yd = Y-T
We know that T=200, ...
Algebraic manipulation of IS-LM model to obtain the the IS and LM relations is provided.