How do you derive the IS LM curve?

ADVERTISEMENTS: In order to derive the LM curve which shows money market equilibrium, we have to find combinations of r and Y that equate money demand with a fixed money supply. The LM curve is a locus of points showing all combinations of r and Y which equilibrate the money market.

How is the IS curve derived?

In the derivation of the IS curve we seek to find out the equilibrium level of national income as determined by the equilibrium in goods market by a level of investment determined by a given rate of interest. Thus IS curve relates different equilibrium levels of national income with various rates of interest.

How the LM curve is derive why it slope upward give reason for it?

The LM curve slopes upward because higher levels of income (GDP) induce increased demand to hold money balances for transactions, which requires a higher interest rate to keep money supply and liquidity demand in equilibrium.

How is the IS curve derived from the Keynesian cross?

If the marginal propensity to consume is high, then a given change in investment demand causes a big increase in national income and product. Hence the IS curve is flat. In the Keynesian cross model, investment demand is exogenous. If investment demand is independent of the interest rate, then the IS curve is vertical.

What is the IS curve formula?

The name “IS curve” derives from the property that it represents that desired investment equals desired saving. i(r)=[y−t −c(y)] + (t −g).

When we derive LM curve we start by changing the?

The LM curve, the equilibrium points in the market for money, shifts for two reasons: changes in money demand and changes in the money supply. If the money supply increases (decreases), ceteris paribus, the interest rate is lower (higher) at each level of Y, or in other words, the LM curve shifts right (left).

What is LM curve How is it derived from money market equilibrium on which factors does its slope and position depend?

The slope of the LM curve depends upon the income elasticity and the interest elasticity of the demand for money. Income-elasticity measures the responsiveness of the demand for money to changes in income while interest elasticity measures the responsiveness of the demand for money to changes in the rate of interest.

How is IS curve derived in a commodity market?

Derivation of IS Curve: The IS-LM curve model emphasises the interaction between the goods and money markets. The goods market is in equilibrium when aggregate demand is equal to income. The aggregate demand is determined by consumption demand and investment demand.

How is the LM curve derived in a closed economy?

LM curve: the market for money In a closed economy, the interest rate is determined by the equilibrium of supply and demand for money: M/P=L(i,Y) considering M the amount of money offered, Y real income and i real interest rate, being L the demand for money, which is function of i and Y.

What factors determine the slope of IS and LM curves?

What do you mean by money market equilibrium derive LM curve when does the LM curve shift use diagram to explain?

The LM curve, “L” denotes Liquidity and “M” denotes money, is a graph of combinations of real income, Y, and the real interest rate, r, such that the money market is in equilibrium (i.e. real money supply = real money demand). The graphical derivation of the LM curve is illustrated below.