Question

Q1) Define and derive the IS-LM model. More specifically, how we obtain the IS-LM equilibrium? Please explain every step in detail. What happens if autonomous government spending increases? Use graphs to illustrate your points. PLEASE DON'T USE BOOK DEFINITIONS!

Answer 1

The IS-LM model i 2-d macroeconomic intersection showing relation between the investment saving [IS] and the liquidity preference-money supply[LM] which help not only calculating fluctuations in the national income but also help in implementing stabilising policies.

It get equilibrium by the intrsection of IS and LM given , real GDP on horizontal axis and real interest rate on the vertical axis and also by the intersection we come to know about the equilibrium in product market as well as in the money market.

if there is increase in the autonomus government spending, then due to increase in the government spending there will be increase in the investment-saving [IS] thus making rightward shift in the IS curve, there will be increase in the interest and also increase in the real GDP.