The IS-LM Model of Monetary and Macroeconomic Equilibrium

2013, 2006, 2001

P. LeBel

The IS-LM model provides a foundation for many models of macroeconomic stabilization.
In its simplest form, it portrays the conditions of both monetary and real savings and investment equilibrium.
The equations below specify the general conditions necessary to achieve equilibrium in the
monetary sectors of the economy, and in the real savings-investment sector of the economy.
Simulation Tableau
Simulation Base Case
Disposable Income MPC

0.9000 0.6250

Tax Rate

0.2000 0.2000

Investment Function Intercept Term

1,580.00

Investment Function Interest Rate Coefficient

Solution Values:

40.00

-1,600.00 #####

Base

Interest Rate

3.62%

6.14%

$16,508

425.71

Government Autonomous Expenditure Level

$3,000

85.14

Actual Output

Money Supply (Ms)

$6,300

91.00

Tax Receipts

$3,302

85.14

0.1200 0.2000

Gov Exps.

$3,000

85.14

Gov. Bal.

$302

0.00

-5,000.00 ##### Full Empl Output

$17,800

448.50

Actual Output

$16,508

425.71

Unemployment Rate

7.26%

5.08%

CPI

2.91%

2.70%

Misery Index

10.17%

7.78%

Monetary Transactions Demand Coefficient

Money Asset Demand Function Intercept Term

4,500.00

Money Asset Demand Interest Coefficient

12.00

A. Derivation of the IS Function:

1.

C=

0.9000 Yd

2.

T=

0.2000 Yg

3.
4.
5.

+ 100.00

I = 1,580.00 -1,600.00 i
G = 3,000.00
Ms = 6,300.00

6.

Mdt =

7.

Mda = 4500.00 -5,000.00 i

0.12 Yg

8.

Yg = C + I + G

9.

Ms = Mdt + Mda

10.

11.

12.

Yd = Yg - T
=

Yg

0.8000 Yg

C=

-0.2000 Yg

(0.80) (0.900)

Yg

0.72 Yg

+ 100.00

Yg =

(0.72 Yg

+ 100.00)

0.72 Yg

0.28 Yg =

-1,600.00 i

4,680.00

1,580.00 ###### i) +

4,680.00

-1,600.00 i

13. IS = Yg = 16,714.29 -5,714.29 i

B. Derivation of the LM Function

Since Ms = Mdt + Mda,
14. #######

0.12 Yg +

0.12 Yg =

(4500.00

1,800.00

15.LM = Yg = 15,000.00

-5000 i)
##### i

41,666.67 i

C. Derivation of Equilibrium Interest Rate

16. IS = LM
17. ####### -5,714.29 i -Yg
18. ####### i
19.

= 15,000.00

####### i

1,714.29

i = 3.6181%

D. Derivation of the Equilibrium Level of Output

Page 1

Yg

3,000.00

(Based on substitution of the equilibrium interest rate in either the IS or LM equation)

20.

Yg = 15,000.00

########

= 15,000.00

1,507.54

21.

Yg = 16,507.54

(0.04)

IS = 16,714.29 -5,714.29 i
LM = 15,000.00 ####### i
i = 3.6181%
i
0.072
0.070
0.067
0.065
0.062
0.060
0.057
0.055
0.052
0.049
0.047
0.044
0.042
0.039
0.037
0.034
0.032
0.029
0.027
0.024
0.022
0.019
0.016
0.014
0.011
0.009
0.006
0.004
0.001
0.000
0.000

LM0.07
18,015.08
17,909.14
17,803.20
17,697.26
17,591.32
17,485.39
17,379.45
17,273.51
17,167.57
17,061.63
16,955.70
16,849.76
16,743.82
16,637.88
16,531.94
16,426.01
16,320.07
16,214.13
16,108.19
16,002.25
15,896.32
15,790.38
15,684.44
15,578.50
15,472.56
15,366.63
15,260.69
15,154.75
15,048.81
0.00
0.00

0.0025
IS
#######
#######
#######
#######
#######
#######
#######
#######
#######
0.00IS-LM
0.00

0.003
$15,106
0.005
$15,212
0.008
$15,318
0.010
$15,424
0.013
$15,530
0.015
$15,636
0.018
0.020 $15,742
$15,848
0.023
$15,953
0.025
$16,059
0.028
$16,165
0.031
$16,271
0.033
$16,377
0.036
$16,483
0.038
$16,589
0.041
$16,695
0.043
$16,801
0.046
$16,907
0.048
$17,013
0.051
$17,119
0.053
$17,225
0.056
$17,331
0.058
$17,437
0.061
$17,543
0.064
$17,648
0.066
$17,754
0.069
$17,860
0.071
$17,966
Equilibrium
0.074
0.076 $18,072
$18,178
0.079
$18,284
0.081
$18,390

LM
0.254%
0.509%
0.763%
1.017%
1.271%
1.526%
1.780%
2.034%
2.288%
2.543%
2.797%
3.051%
3.305%
3.560%
3.814%
4.068%
4.322%
4.577%
4.831%
5.085%
5.339%
5.594%
5.848%
6.102%
6.356%
6.611%
6.865%
7.119%
7.373%
7.628%
7.882%
8.136%

IS
28.15%
26.29%
24.44%
22.58%
20.73%
18.88%
17.02%
15.17%
13.31%
11.46%
9.61%
7.75%
5.90%
4.05%
2.19%
0.34%
-1.52%
-3.37%
-5.22%
-7.08%
-8.93%
-10.79%
-12.64%
-14.49%
-16.35%
-18.20%
-20.06%
-21.91%
-23.76%
-25.62%
-27.47%
-29.33%

IS
$16,700
$16,685
$16,671
$16,656
$16,642
$16,627
$16,613
$16,598
$16,584
$16,569
$16,554
$16,540
$16,525
$16,511
$16,496
$16,482
$16,467
$16,453
$16,438
$16,424
$16,409
$16,395
$16,380
$16,366
$16,351
$16,337
$16,322
$16,307
$16,293
$16,278
$16,264
$16,249

30%
3.6181%

25%
20%
15%
10%
5%
0%
$15,106

$15,424

$15,742
LM

$16,059
IS

Page 2

$16,377

$16,695