# 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.

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#### 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.

The IS and LM Curve

Derive the LM curve by one of the standard methods used in Macroeconomics. Be sure to label all axis and curves on your graph. Explain in writing to what your derivation brings equilibrium and how it accomplishes this.

Derive the IS curve by one of the standard methods used in Macroeconomics. Explain in writing to what market your derivation brings equilibrium and how it accomplishes this.

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