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Deriving AD From IS-LM Model

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IS - LM LM curve is function of money demand, which is function of price level So each LM is associated with a given price level IS LM

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IS - LM Let LM1 be associated with P = 100 And this will generate an equilibrium level of income, Y1. So, P = 100 & Y = Y1 gives one point on AD curve IS LM Y1

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Aggregate Demand So, P = 100 & Y = Y1 gives one point on AD curve Y1 P 100

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IS - LM So, if we change P to 110, LM will change And this will generate a new equilibrium level of income, Y2. So, P = 110 & Y = Y2 gives one more point on AD curve IS LM(100) Y1 LM’(110) Y2

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Aggregate Demand So, P = 110 & Y = Y2 gives one more point on AD curve Y1 P 100

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Aggregate Demand Thus, two points on aggregate demand curve Y1 P 100 AD 110 Y2

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And so on….

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© 2008 Pearson Education Canada22.1 Chapter 22 The ISLM Model.

© 2008 Pearson Education Canada22.1 Chapter 22 The ISLM Model.

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