IS-LM Model Example - IS-LM Model Example Given the...

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©Copyright – Jose Lopez-Calleja, 2009, All Rights Reserved. IS-LM Model Example Given the following information, derive the equations for the IS and LM curves. C = C 0 + c Y D (A) Consumption Function I = I 0 + I Y Y – I r r (B) Investment Function G = G 0 (C) Government Spending T = T 0 (D) Autonomous Taxes (not a function of Income) Y D = Y – T (E) Disposable Income (M/P) d = L 0 + L Y Y – L r r (F) Money Demand (Demand for Real Money Balances) M/P = M 0 (G) Money Supply c = marginal propensity to consume [a coefficient] C 0 = autonomous consumption [exogenous variable] I 0 = autonomous investment [exogenous variable] I Y = income sensitivity of investment spending [a coefficient] I r = interest rate sensitivity of investment spending [a coefficient] L o = transactions demand for money [exogenous variable] L Y = income sensitivity of money demand [a coefficient] L r = interest rate sensitivity of money demand [a coefficient] You can use equations (A) through (E) to determine the equation for the IS curve.
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