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IS LM Curve

. Problem 1
Suppose that the equation for autonomous planned spending, Apr is Ap = 6,200-200r and the value of the multiplier, k, is 2.5.
(a) Derive the equation for the IS curve, Y = kAp. Graph the IS curve for interest rates between 0 and 8, with intervals of one-half of a percentage point.

(b) Suppose the equation for the LM curve is Y = 13,500 + 100r. Use this equation to explain the level of income at which there is a zero lower bound on the federal funds rate, the interest rate that the Fed controls.

(c) Graph the LM curve for interest rates between 0 and 8, with interval of one-half of a percentage point.

Solution Preview

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Problem 1
Suppose that the equation for autonomous planned spending, Apr is Ap = 6,200-200r and the value of the multiplier, k, is 2.5.
(a) Derive the equation for the IS curve, Y = kAp. Graph the IS curve for interest rates between 0 and 8, with intervals of one-half of a percentage point.
Y=kAp
Ap = 6200-200r
k=2.5
Y = 2.5*(6200-200r) = 15500 - ...

Solution Summary

Shows how to draw IS and LM curves.

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