2 marksMacroeconomicsIS-LM modelEquilibrium and shifts in IS-LMHardabout 3 min

IIT JAM 2022 Question 57: IS-LM model

Product market: $C = 300 + 0.8(Y - T)$ , $T = 200 + 0.2Y$ , $I_0 = 300$ , $G_0 = 400$ . Money market: $\dfrac{M_0}{P} = 0.4Y - 200i$ , $M_0 = 900$ , $P = 1$ (fixed). The equilibrium interest rate (in percent) is _______ (round off to 2 decimal places).

Answer and worked solution

Answer: 16.65 to 16.69

IS: $Y = 300 + 0.8(Y - 200 - 0.2Y) + 300 + 400 = 840 + 0.64Y$ , so $0.36Y = 840$ and $Y = 2333.33$ .

LM: $900 = 0.4(2333.33) - 200i = 933.33 - 200i$ , so $200i = 33.33$ and $i = 0.1667$ , that is $16.67\%$ , within the accepted range.

Plain-text version

Product market: C = 300 + 0.8(Y - T), T = 200 + 0.2Y, I₀ = 300, G₀ = 400. Money market: M₀/P = 0.4Y - 200i, M₀ = 900, P = 1 (fixed). The equilibrium interest rate (in percent) is _ (round off to 2 decimal places).

Also written as: Product market: C = 300 + 0.8(Y - T), T = 200 + 0.2Y, I_0 = 300, G_0 = 400. Money market: M_0/P = 0.4Y - 200i, M_0 = 900, P = 1 (fixed). The equilibrium interest rate (in percent) is _ (round off to 2 decimal places).

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

What this question tests

This question is on Equilibrium and shifts in IS-LM, part of IS-LM model in Macroeconomics.

Solving for income and the interest rate and tracing what shifts each curve.

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