ECOS2002 Intermediate MacroeconomicsWeek 8:Christopher GibbsUniversity of SydneySemester 1, 2021The IS/LM model• An algebraic exampleY = C + I + G (MP )D = (MP )SC = C0 + C1(Y – T) (MP )D = L0Y – L1iI = I0 – I1r (MP )S = MP G = G ¯T = T¯i = r + πe • L0: The responsiveness of money demand to income• L1: The responsiveness of money demand to the nominalinterest rateThe IS/LM model• Goods Market EquilibriumY = 11 – C1[C0 – C1T¯ + I0 – I1r + G¯]• Money Market Equilibriumr =L0L1Y – πe – ML1PThe IS/LM model• General Equilibrium in the EconomyY =11 – C1[C0 – C1T¯ + I0 – I1r + G¯]Y =11 – C1[C0 – C1T¯ + I0 – I1 L L0 1 Y – πe – LM1P + G¯]Y (1 – C1) = [C0 – C1T¯ + I0 – I1 LL01 Y – πe – LM1P + G¯]Y (1 – C1) +I1L0L1Y = [C0 – C1T¯ + I0 – I1 -πe – LM1P + G¯]Y =11 – C1 + I1LL10 [C0 – C1T¯ + I0 + I1πe + IL11MP + G¯]The IS/LM model• General Equilibrium in the EconomyY = 11-C1+ I1LL10 [C0 – C1T¯ + I0 + I1πe + IL11MP + G¯]IS=LM Multiplier IS=LM Autonomous Expenditure11 – C1 + I1LL10
