2 marksMacroeconomicsIS-LM modelDeriving aggregate demand from IS-LMHardabout 3 min

IIT JAM 2021 Question 60: IS-LM model

An IS-LM closed economy has $C = 200 + 0.8(Y - T) - 500r$ , $I = 200 - 500r$ , $T = 20 + 0.25Y$ , $\dfrac{M^d}{P} = 0.5Y - 250(r + \pi^e)$ . If $G = 196$ , $\pi^e = 0.1$ , nominal money supply $= 9890$ and full-employment output $= 1000$ , the full-employment equilibrium price level is _______ (in integer).

Answer and worked solution

Answer: 23

The IS relation reduces to $0.4Y = 580 - 1000r$ . At full-employment $Y = 1000$ , $400 = 580 - 1000r$ , so $r = 0.18$ .

Real money demand is $0.5(1000) - 250(0.18 + 0.1) = 500 - 70 = 430$ . Setting $\dfrac{9890}{P} = 430$ gives $P = 23$ . The answer is $23$ .

Plain-text version

An IS-LM closed economy has C = 200 + 0.8(Y - T) - 500r, I = 200 - 500r, T = 20 + 0.25Y, M^d/P = 0.5Y - 250(r + π^e). If G = 196, π^e = 0.1, nominal money supply = 9890 and full-employment output = 1000, the full-employment equilibrium price level is _ (in integer).

Also written as: An IS-LM closed economy has C = 200 + 0.8(Y - T) - 500r, I = 200 - 500r, T = 20 + 0.25Y, M^d/P = 0.5Y - 250(r + pi^e). If G = 196, pi^e = 0.1, nominal money supply = 9890 and full-employment output = 1000, the full-employment equilibrium price level is _ (in integer).

IS-LM model has come up 137 times in 7 exams since 2004.

What this question tests

This question is on Deriving aggregate demand from IS-LM, part of IS-LM model in Macroeconomics.

How varying the price level in IS-LM traces out the aggregate demand curve.

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