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ISLM Model Numerical 1

This document provides an example of using the IS-LM model to find the equilibrium levels of income and interest rates in the economy. It presents the IS and LM curves with their corresponding equations describing goods market equilibrium and money market equilibrium. By setting the two equations equal to each other and solving simultaneously, the example finds the equilibrium interest rate is 6% and equilibrium income is $3,500. It shows checking the solution by substituting back into one of the original equations.

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Muhammad Iqbal
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514 views9 pages

ISLM Model Numerical 1

This document provides an example of using the IS-LM model to find the equilibrium levels of income and interest rates in the economy. It presents the IS and LM curves with their corresponding equations describing goods market equilibrium and money market equilibrium. By setting the two equations equal to each other and solving simultaneously, the example finds the equilibrium interest rate is 6% and equilibrium income is $3,500. It shows checking the solution by substituting back into one of the original equations.

Uploaded by

Muhammad Iqbal
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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IS-LM Model

Numerical Example

C = 0.8 Yd
Yd =Y-t
t=0.25
I=900-50i
G=800
L=0.25-62.5i
M/P=500

C = 0.8 Y
Yd =Y-t
t=0.25
I=900-50i
G=800
L=0.25-62.5i
M/P=500
d

1. What is the equation that


describes IS curve?
2. What is the general
definition of IS curve?
3. What is the equation that
describes LM curve?
4. What is the general
definition of LM curve?
5. What are the equilibrium
levels of income and
interest rate?
6. What is the level of g ?
7. How much increase in
income would be in G
increases by 100, in
presence of asset markets.
8. Why is the difference?

IS
IS represents goods markets
equilibrium i.e. Y=AD where Y is
output or income and AD=C+I+G
Y=0.8(1-0.25)Y+900-50i+800
Y=1700+0.6Y-50i
0.4Y=1700-50i
0.4Y+50i=1700 (IS equation)

LM
LM equation represents the money
markets equilibrium i.e. where
supply of money is equal to demand
for money M/P=L
500=0.25Y-62.5i (LM equation)
So we have two equations and two
unknowns. To find equilibrium level of
Y and I would need to solve these
simultaneous equations.

Equilibrium i
0.25Y-62.5i=500 (1)
0.4Y+50i=1700 (2)
Multiply (1) by digit 1.6 to make it
0.4Y-100i=800 (1)
Subtract eq.(2) from (1)
0.4Y-100i=800
-0.4Y-50i=-1700
-150i=-900 so i is = 6

Equilibrium Y

Putting i=6 in equation (1)


0.25Y-62.5i=500
0.25Y-62.5(6)=500
0.25Y-375=500
0.25Y=500+375
0.25Y=875
Y=3500

Exercise
put i=6 in eq. (2) and check the
results for Y
It should be 3500!

Equilibrium Y

0.4Y+50i=1700
0.4Y+50(6)=1700
0.4Y+300=1700
0.4Y=1400
Y=3500

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