Question

IS-LM model formula?

Answer 1

The IS-LM model represents the relationship between interest rates (I) and real output (Y) in the goods and money markets. The two main equations are:

1. **IS Curve**: Represents equilibrium in the goods market. It shows combinations of interest rates and output where investment (I) equals savings (S). The general form can be expressed as \( Y = C(Y - T) + I(r) + G \), where \( C \) is consumption, \( T \) is taxes, \( I \) is investment depending on the interest rate \( r \), and \( G \) is government spending.

2. **LM Curve**: Represents equilibrium in the money market. It shows combinations of interest rates and output where money demand equals money supply. The general form can be expressed as \( M/P = L(Y, r) \), where \( M \) is the nominal money supply, \( P \) is the price level, and \( L \) is the liquidity preference depending on income \( Y \) and interest rate \( r \).

To analyze the model, you can delve deeper into how shifts in fiscal policy (affecting IS) or monetary policy (affecting LM) can lead to changes in equilibrium output and interest rates.

Answer 2

The IS-LM model is used to analyze the interaction between the real economy and the monetary sector. The formulas for the IS and LM curves are:

- **IS Curve**: Represents equilibrium in the goods market. The formula is typically \( Y = C(Y - T) + I(r) + G \), where \( Y \) is national income/output, \( C \) is consumption, \( T \) is taxes, \( I \) is investment, \( r \) is the interest rate, and \( G \) is government spending.

- **LM Curve**: Represents equilibrium in the money market. The formula is usually \( M/P = L(Y, r) \), where \( M \) is the nominal money supply, \( P \) is the price level, \( L \) is the liquidity preference (a function of income and interest rate), and \( r \) is the interest rate.

Would you like to delve into how these curves interact or how changes in parameters affect equilibrium?