Answer to Question #322685 in Macroeconomics for komal

Question

Question:-

Derive the equations for IS and LM curves. Specify the parameters of the model. Explain how the levels of equilibrium output and interest rate are influenced by changes in these

parameters.

Answer 1

The IS-LM model offers another perspective on how the economy's short-run authentic gross domestic product (real GDP) is determined. The price level need to be fixed, much like the aggregate spending model. On the other hand, the IS-LM model interprets the interest rate as an endogenous variable rather than an external variable (a change in the interest rate causes a change in autonomous spending).

The IS-LM model is based on a money market and a goods market analysis, which jointly estimate the equilibrium levels of interest rates and production in the economy given prices. The model discovers interest rate and output (GDP) combinations that bring the money market to a state of equilibrium. The LM curve is formed as a result of this. The model also discovers interest rate and output combinations that bring the goods market to a state of equilibrium. The IS curve is the result of this. The equilibrium is the interest rate and output combination on both the IS and LM curves.