Is Lm, Aggregate Demand And Aggregate Supply

1824 words - 8 pages

Part (A)
IS-LM, Aggregate Demand and Aggregate Supply
Behavioral Equations, Identities, Equilibrium Conditions and List of Exogenous and Endogenous Variable
The IS-LM Model is based upon six Behavioral equations, each describing the determinants of one of the macroeconomic variable considered by the model:
1. Consumption
2. Investment
3. Government spending
4. Tax revenue
5. Money demand
6. Money supply

The description of the IS-LM model is completed by three key identities that are defining the links between aggregate demand, aggregate supply and the equilibrium level of income.
Aggregate demand: Z = C=I=G --------------------------------1
Since ...view middle of the document...

80 (1 – 0.5)]
▲Y 200 + 250
▲r = - 0.6/450 = 0.0013

Intercept of IS Curve:

r = C0 + I0 + G0+ Cyd TA0
Cr + Ir
r = 300 + 258.5 + 50 – 0.80 (20.5)
200 + 250
r = 592.1/450 = 1.315

Numerical Value of the Slope & Intercept of LM Curve
Slope of LM Curve:
▲r = Ly
▲Y Lr
=> 0.5/250 = 0.002
Intercept of LM Curve:
r = 1 [M0/p – L0] - ∏e
r = 1/250 [9150 – 457.5 – 0.02 ]
r = 34.76

Part (C)
Value of Cyd

Cyd = 0.80
 Economic interpretation:
Cyd = Marginal Propensity to Consume
Ir = 250
 Economic Interpretation

▲I/▲r = Rate change in investment
Rate change in interest
Value of Ly:
Ly = 0.5
 Economic Interpretation

▲L/▲y = Rate Change in Demand for Money
Rate Change in Income

Value of Ns w:

Ns = 55 + 10 (1-0.5) w
55 + 5w
Ns w = 5

 Economic Interpretation

Ns w = ∂Ns = rate of change in Labor Supply
∂w rate of change in real wage

Part (D)
From Production Function:
Y = A(5N – 0.0025N2) -------------------------------------------------> eq: 1

First we find N (but for N we Find Frist w = MPN)
MPN = A (ƒ1 – ƒ2N)
A = 2 ; ƒ1= 5 ; ƒ2 = 0.0025 ; N = ?
 2 (5-0.0025N) = w
 10 – 0.005N = w -------------------------------------------------> eq: 2
Now for Ns :
Ns = 55+10 (1- Ty) w
Ns = 55 + 10 (1 – 05) w
Ns = 55 + 5w -------------------------------------------------> eq: 3

Now put value of N eq (3) in eq (2) to find N as Ns = N
w = 10 – 0.005 (55 + 5w)
w = 10 – 0.275 – 0.025w
w – 0.025w = 9.725
w = 9.725/1.025
w = 9
Now put value of w in eq (3) to find N
N = 55 + 5 (9)
N = 55 + 45
N = 100

Now Put the Value of N in eq (1) to Find Y
Y= A (ƒ1 – ½ ƒ2N2)
Y = 2 (5(100) – 0.0025 (100)2)
Y = 2 (500 – 25)
Y = 950
Now find “r” from Good Market by Putting value of Y in eq(5)

Y = C + I + G --------------------------------------------------------> eq:5
But first find T:

T = T0 + TyY
T = 20 + 0.5 (950)
T = 495
Now put value of T and Y in eq(5) to find r
Y = 300 + 0.80 (Y-T) – 200r + 258.5 – 250r + 50
Y = 300 + 0.80 (950 – 495) – 200r +258.5 – 250r + 50
Y = 300 + 364 + 258.5 + 50 – 450r
Y = 972.5 – 450r -------------------------------------------------------------------> IS Equation
Put value of Y0 in IS Equation
Y0 = 972.5 – 450r

450r = 972.5 – Y0

r = 972.5 – 950
450 450
r = 2.16 – 2.11
r = 0.05

Endogenous variable of IS:
For C: C= 300 + 0.80 (y-T) – 200 (r)
C= 300 + 0.80 (950 – 495) – 200 (0.05)
C= 654
For I: I = 258 – 250 (r)
I= 258.5 – 250 (0.05)
I = 246
For G:
G = 50
For Yd : Yd = Y-T
Yd = 950 -495
Yd = 455

Endogenous variable of LM
For L:
L = 0.5 (Y) – 250 (i)
L = 0.5 (950) – 250...

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