Purchase Solution

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

Not what you're looking for?

Ask Custom Question

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.

Purchase this Solution
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.

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 ...

Purchase this Solution
Free BrainMass Quizzes
Economics, Basic Concepts, Demand-Supply-Equilibrium

The quiz tests the basic concepts of demand, supply, and equilibrium in a free market.

Economic Issues and Concepts

This quiz provides a review of the basic microeconomic concepts. Students can test their understanding of major economic issues.

Basics of Economics

Quiz will help you to review some basics of microeconomics and macroeconomics which are often not understood.

Elementary Microeconomics

This quiz reviews the basic concept of supply and demand analysis.

Pricing Strategies

Discussion about various pricing techniques of profit-seeking firms.

View More Free Quizzes
Related BrainMass Solutions

  • AD/AS, IS/LM, Keynesian Cross, Money Mkts. & fiscal policy.

    In other words how it is built up from the IS/LM model which depends on the money market and the Keynesian cross model. I then demonstrate how fiscal policies are used to steer the macro economy from within this framework.

  • Changes in the shapes and locations of IS and LM curves

    What factor(s) causes the LM curve to shift? 4. In words what does the LM curve represent? 5. Is the interest rate we use in the IS-LM model real or nominal? How does your answer pertain to the shape of the aggregate supply curve? 1.

  • Economics: Demand and Supply

    The implications of IS/LM model show that interest rates are snapback to the initial levels after the decrease or increase in the rates in response to expansionary monetary policy and anterior to a complete alteration of commodity prices.

  • interest rate parity concepts

    The intersection of the LM and IS curves yields an equilibrium point where the goods and financial markets are in equilibrium. This determines output and an interest rate for an economy.

  • aggregate expenditure model and tax cuts

    The IS LM model uses a positively sloped line to represent the goods market (LM curve) and a negatively sloped line to represent the money market (IS curve). IS-curve is negatively sloped and steeper with a lower value of b (the interest rate).

  • Where the IS and LM curves come from, and how to draw them

    The LM curve slopes up, and the IS curve slopes down. The LM curve is related to the money market. The IS curve is related to the goods market.

  • goods and services produced by workers

    The IS-LM model shows the relationship between the interest rates and real output in the goods and services market and the money market. IS means investment saving curve. The LM curve is the liquidity preference money supply curve.

  • Algebraic manipulation of IS-LM model

    87622 Algebraic Manipulation of IS-LM Model Consider the following IS-LM model: Goods Market C=200 +.25Yd I=150 +.25Y-1000r G=250 T=200 Money Market Md=2Y-8000r Ms=1600 a. Derive the IS Relation.

  • Shifts in IS and LM curves

    This would result in an outward shift of the LM curve from LM1 to LM2, as shown on the attached file "Fed." GDP is restored to Y1 and interest rates fall further, to r3. d.

View More Related Solutions