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Questions › JNU › JNU SIS 2013 › Q25
4 marks, −1Macroeconomics › IS-LM model › Deriving aggregate demand from IS-LMHardabout 4 min

JNU SIS 2013 Question 25: IS-LM model

The equation for the IS curve is given as Y=c0+b0+G‾1−c1(1−t)−b11−c1(1−t) iY = \frac{c_0 + b_0 + \overline{G}}{1 - c_1(1-t)} - \frac{b_1}{1 - c_1(1-t)}\,iY=1−c1​(1−t)c0​+b0​+G​−1−c1​(1−t)b1​​i and that for the LM curve is given as i=1m2(m0−MSP+m1Y)i = \frac{1}{m_2}\left(m_0 - \frac{M^S}{P} + m_1 Y\right)i=m2​1​(m0​−PMS​+m1​Y) where YYY is income, iii is the rate of interest, PPP is the price level, MSM^SMS is money supply and G‾\overline{G}G denotes government spending. Further, let 11−c1(1−t)=λ\dfrac{1}{1 - c_1(1-t)} = \lambda1−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.

TestStop has 9 past-paper questions on this subtopic; the nearest in year are below.

  • IIT JAM 2021 · Q60An IS-LM closed economy has C = 200 + 0.8(Y - T) - 500r, I = 200 - 500r, T = 20 + 0.25Y, M^d/P = 0.5Y…
Practise IS-LM modelMore on Deriving aggregate demand from IS-LM

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