Question

Derive the IM and IS from the following equation.
Commodity market y=c+I c=200+2/5y and I=1199-12r
Money market
MDT=1/2y
MDS=100-mr
MS=1500

Answer 1

IS equation gives the good market equilibrium represented by:

Total Income=Aggregate Expenditure= Consumption +Investment.

$y=c+I$

$c=200+\frac{2}{5}y$

$I=1199-12r$

$y=(200+\frac{2}{5}y)+1199-12r$

$y=\frac{2}{5}y+1399-12r$

$y-\frac{2}{5}y=1399-12r$

$y(1-\frac{2}{5})=1399-12r$

$y=\frac{1399-12r}{\frac{3}{5}}$

$y=2332-20r$ ...IS equation

LM equation gives the money market equilibrium represented by:

Money Demand =Money Supply

$(\frac{M}{P})^d=(\frac{M}{P})^s=d_1y-d_2r=\frac{M}{P}$

$r=(\frac{\frac{M}{P}}{d_2})+(\frac{d_1}{d_2})y$ …LM equation