The equation for the IS curve is given as Y=1−c1(1−t)c0+b0+G−1−c1(1−t)b1i and that for the LM curve is given as i=m21(m0−PMS+m1Y) where Y is income, i is the rate of interest, P is the price level, MS is money supply and G denotes government spending. Further, let 1−c1(1−t)1=λ. Then the expression for the aggregate demand function and its slope will be
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The equation for the IS curve is given as Y = (c₀ + b₀ + G̅)/(1 - c₁(1-t)) - b₁/(1 - c₁(1-t)) i and that for the LM curve is given as i = 1/m₂(m₀ - M^S/P + m₁ Y) where Y is income, i is the rate of interest, P is the price level, M^S is money supply and G̅ denotes government spending. Further, let 1/(1 - c₁(1-t)) = λ. Then the expression for the aggregate demand function and its slope will be (A) Y = m₂λ/(m₁ + λ b₁ m₂)(c₀ + b₀ + G̅) - b₁λ/(m₁ + λ b₁ m₂)(m₀ - M^S/P); negative (B) Y = m₁λ/(m₂ + λ b₁ m₁)(c₀ + b₀ + G̅) - m₁λ/(m₂ + λ b₁ m₁)(m₀ - M^S/P); positive (C) Y = m₂λ/(m₂ + λ b₁ m₁)(c₀ + b₀ + G̅) - b₁λ/(m₂ + λ b₁ m₁)(m₀ - M^S/P); negative (D) Y = (b₁ m₂λ)/(m₂ + λ b₁ m₂)(c₀ + b₀ + G̅) - (b₁ m₂λ)/(m₂ + λ b₁ m₂)(m₀ - M^S/P); positive
Also written as: The equation for the IS curve is given as Y = (c_0 + b_0 + G_bar)/(1 - c_1(1-t)) - b_1/(1 - c_1(1-t)) i and that for the LM curve is given as i = 1/m_2(m_0 - M^S/P + m_1 Y) where Y is income, i is the rate of interest, P is the price level, M^S is money supply and G_bar denotes government spending. Further, let 1/(1 - c_1(1-t)) = lambda. Then the expression for the aggregate demand function and its slope will be
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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