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IS
IS
1 1
Y= G =
G bi) = 1c (1t ) [ 1b ]
1
Y= ( bi )
1b
By mapping out the relationship between Y and i when the goods market
is in equilibrium we get the IS curve.
By mapping out the relationship between Y and i when the money market
is in equilibrium we get the LM curve.
When we set IS=LM we can solve for the equilibrium levels of i and Y. This
represents simultaneous equilibrium in the goods market and the money
market.
At point E, interest rates and income levels are such that the public holds
the existing money stock and planned spending equals output.