Question
There is only one combination of income and the rate of interest at which both the goods and the money market are in equilibrium.
Step 1
In the goods market, equilibrium is achieved when the total quantity of goods produced equals the total quantity of goods demanded. In the money market, equilibrium is achieved when the total quantity of money supplied equals the total quantity of money demanded. Show more…
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Key Concepts
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The IS curve is upward sloping showing that there is a direct relationship between income and the rate of interest.
The $L M$ curve is upward sloping showing that there is a direct relationship between income and the rate of interest.
Determine the equilibrium income, $Y$, and interest rate, $r$, given the following information about the commodity market $$ \begin{aligned} &C=0.7 Y+85 \\ &I=-50 r+1200 \end{aligned} $$ and the money market $$ \begin{aligned} &M_{\mathrm{s}}=500 \\ &L_{1}=0.2 Y \\ &L_{2}=-40 r+230 \end{aligned} $$ Sketch the IS and LM curves on the same diagram. What effect would an increase in the value of autonomous investment have on the equilibrium values of $Y$ and $r ?$
Linear Equations
National income determination
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