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

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    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.

    © BrainMass Inc. brainmass.com October 9, 2019, 10:25 pm ad1c9bdddf

    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.