Illustration 64
Presume the consumption and Investment Functions as below:
C = 200
+ 0.75Y
I = 500 – 5r
Determine the equation of the IS curve.
Solution
The equation of the IS curve is:
Y = C + I
Y = 200 + 0.75Y + 500 – 5r
Y – 0.75Y = 200 + 500 – 5r
0.25Y = 700 – 5r
Y = 700 – 5r
0.25
Y = 2,800 – 20r
Illustration 65
Presume that the supply of money is $800. The transactions and speculative demand for money functions are given below.
m1 = 0.25Y
msp = 200 – 4r
Determine the equation of the LM curve.
md = m1 + msp
md = 0.25Y + 200 – 4r
In symmetry, md = ms
Therefore,
0.25Y + 200 – 4r = 800
0.25Y = 800 – 200 + 4r
0.25Y = 600 + 4r
Y = 600
+ 4r
0.25
Y = 2,400 + 16r
Hence the function of Y = 2,400 + 16r.
Illustration 66
Presume the consumption and investment function as below:
C = 200
+ 0.75Y
I = 500 – 5r
Also presume that the money supply is $ 560. The money demand function is as below:
md = 0.25Y – 4r
- Determine the equation of IS Curve
- Determine the equation of the LM curve
- Determine the concurrent symmetry for the IS Curve and LM curves
Solution
- IS Equation is as follows:
Y = C + I
Y = 200 + 0.75Y + 500 – 5r
Y – 0.75Y = 700 – 5r
0.25Y = 700 – 5r
Y = 700 – 5r
0.25
Y = 2,800 – 20r
- LM Equation is as follows:
md = 0.25Y – 4r
ms = 560
In Symmetry,
md = ms
Therefore,
0.25Y – 4r = 560
0.25Y = 560 + 4r
Y = 560
+ 4r
0.25
Y = 2,240 + 16r
- Concurrent Equation for the IS Curve and LM curves are as follows:
IS = LM
2,800 – 20r = 2,240 + 16r
2,800 – 2,240 = 32r
560 = 32r
r = 17.5%
Hence,
Y = 2,800 – (20 *17.5)
= 2,800 – 350
Y = 2,450
Concurrent symmetry for the IS Curve and LM curves subsists when Y = 2,450 and r = 17.5%.
Illustration 67
Presume the consumption, investment and money demand and supply functions are as below:
C = 0.75Y
I = 215
million dollars – 0.25r
md = 0.25Y – 5r
ms = 160 million dollars
Ascertain the following:
- The symmetry earnings and the interest rate
- The symmetry earnings and the interest rate when self-governing investment enhances to 270 million dollars.
Solution
- Symmetry earnings and the interest rate are as below:
Symmetry of the IS Curve = Y = C + I
Y = 0.75Y + 215– 5r
Y – 0.75Y = 215 – 5r
0.25Y = 215 – 5r
Y = 215 – 5r
0.25
Y = 860 – 20r
Equation of the LM curve is as follows:
In Symmetry, md = ms
Therefore,
0.25Y – 5r = 160
0.25Y = 160 + 5r
Y = 160
+ 5r
0.25
Y = 640
+ 20r
Concurrent symmetry for the IS and LM curves are as below:
IS = LM
860 – 20r = 640 + 20r
40r = 220
r = 5.5%
Y = 860 – 20r
= 860 – (20*5.5)
= 860 – 110
Y = 750
Concurrent symmetry for the IS and LM curves subsists when Y = 750 and r = 5.5%
- The symmetry earnings and the interest rate when self governing investment enhances to 270 million dollars and the equation of the new IS curve will be as below:
Y = C + I
Y = 0.75Y + 270 – 0.25r
Y – 0.75Y = 270 – 0.25r
0.25Y = 270 – 0.25r
Y = 270 – 0.25r
0.25
Y = 1,080 – 1r
Equation of the LM curve:
Y = 640 + 20r
Concurrent symmetry for the IS curve and LM curve:
IS = LM
1,080 – r = 640 + 20r
21r = 440
r = 21%
Y = 1,080 – 21
Y = 1,059
Concurrent symmetry for the IS curve and LM curve subsists when Y = 1,059 and r = 21%.
Illustration 68
Presume that the value of k is 0.25.
Determine the direction and volume of movement in the LM curve when,
- The increase in the supply of money is $20 millions and
- The decrease in the supply of money is $50 millions.
Solution
- The direction and the volume of movement in the LM curve when the increase in the supply of money is at $ 20 millions:
Volume of Movement in the LM curve:
1 *
20
0.25
= 80
As there is an enhancement in the supply of money, the LM curve will move to the right.
- The decrease and the volume o movement in the LM curve when the decrease in the supply of money is $50 millions.
Volume of movement in the LM curve:
1 * 50
0.25
= 200
As there is a decrease in the supply of money, the LM curve will move to the left.
Online Live Tutor Equation of the LM curve, Equation of IS Curve:
We have the best tutors in Economics in the industry. Our tutors can break down a complex Equation of the LM curve, Equation of IS Curve problem into its sub parts and explain to you in detail how each step is performed. This approach of breaking down a problem has been appreciated by majority of our students for learning Equation of the LM curve, Equation of IS Curve concepts. You will get one-to-one personalized attention through our online tutoring which will make learning fun and easy. Our tutors are highly qualified and hold advanced degrees. Please do send us a request for Equation of the LM curve, Equation of IS Curve tutoring and experience the quality yourself.
Online IS and LM Functions General Equilibrium Product and Money Market Help:
If you are stuck with an IS and LM Functions General Equilibrium Product and Money Market Homework problem and need help, we have excellent tutors who can provide you with Homework Help. Our tutors who provide IS and LM Functions General Equilibrium Product and Money Market help are highly qualified. Our tutors have many years of industry experience and have had years of experience providing IS and LM Functions General Equilibrium Product and Money Market Homework Help. Please do send us the IS and LM Functions General Equilibrium Product and Money Market problems on which you need help and we will forward then to our tutors for review.
- Built In Stabilisers
- Classical, Keynesian and Modern Outlooks on Monetary Policy
- Discretionary Fiscal Policy
- Economic Development
- Effectiveness of Monetary and Fiscal Policy
- Expansionary fiscal policy
- Extensions of IS-LM Model
- Fiscal Policy
- Gurley Shaw Outlook
- Keynesian Outlook
- Keynesian Outlook, Keynesian system
- Liquidity Theory of Money
- Macro Economics Policy
- Monetary-Fiscal Mix
- Monetary Policy
- Monetarism Versus Keynesianism
