Macro Economics

In: Social Issues

Submitted By krhusain
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Is-Lm, Aggregate Demand and Aggregate Supply
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 firms produce as many goods and services as demanded in the economy, the aggregate supply is written as: Y=Z --------------------------------2
Combination of the equation 1 and 2 gives income identity for a closed economy
Y = C + I + G.
This states that in equilibrium aggregate income must be equal to aggregate demand.
Exogenous variables:

G: Government spending
T: Tax on income
M: Money supply
P: Price level (fixed in the short-run)

Endogenous variables:

Y: Production
C: Consumption
I: Investments
R: Interest rate

Behavior Equations

Y= C + I + G
C= C0 + Cyd Yd –Cr r
I= I0 + Ir r
G= G
TA = TA + Ty Y
LM Behavior Equation
L=L0 + LyY – Lr r

Production Function
Y= Aƒ (K,N)
Identities of IS
C= ƒ (Y+, r –)
I = ƒ (r -)
S= ƒ (Y+, r+ )
TA = ƒ (Y+)
TR= ƒ (Y-)
Identities of LM
Ls = ƒ- (r -)
LT = ƒ+ (r -)
L= ƒ (Y+, r - )

Identities of Production Function
Nd = ƒ - (W/P)
NS = ƒ+ (W/P)

Equilibrium Condition
I-S Equilibrium Condition

Y= C + I + G
LM Equilibrium Condition

Production Function Equilibrium Condition

Nf = NS + Nd

Exogenous &…...

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