# How to construct the IS/LM model from money & goods markets.

Consider the following numerical version of the IS-LM model in a closed economy:

C-400+0.5Yd; I=700-4000r+0.1Y; G=200; Tp=200; Yd=Y-Tp, RLMD=.5Y-7500r; RLMS=500; X=M

Find the equations for the IS Curve and LM Curve

Also, find equilibrium real output (Y), interest rate (r), consumption (C), and Investment (I).

Please show each step, thank you.

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#### Solution Preview

See attachment for solution.

? Let the interest rate increase from r1 to r2 reduce planned investment from I(r1) to I(r2).

? This decrease in investment causes the planned expenditure function to shift down.

? So Y decreases from

Y1 to Y2.

? The IS curve maps out this relationship between the interest rate, r, and ...

#### Solution Summary

Given data on the goods market and the money market I show how these markets are used to construct the IS/LM model. I provide and graphical example and solve the solution algebraically as well.