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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.

https://brainmass.com/economics/general-equilibrium/how-to-construct-the-is-lm-model-from-money-goods-markets-219754

#### 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.

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