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Calculate equilibrium Y and equilibrium r
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3 stepsHere's how to calculate the equilibrium Y and r:
Derive the IS curve (Goods Market Equilibrium)
The goods market equilibrium is given by the equation:
We are given:
First, calculate disposable income ():
Substitute into the consumption function:
Now substitute C, I, and G into the goods market equilibrium equation:
Rearrange to solve for Y:
Derive the LM curve (Money Market Equilibrium)
The money market equilibrium is given by the equation:
We are given:
(Assuming the 'I' is a typo and )Substitute , , and into the money market equilibrium equation:
Rearrange to solve for Y:
Solve for Equilibrium Y and r
Now we have a system of two equations:
- (IS curve)
- (LM curve)
Set the two expressions for Y equal to each other to find r:
Substitute the equilibrium value of r back into either the IS or LM equation to find Y. Using the IS curve:
The equilibrium values are:
Equilibrium interest rate
Equilibrium output
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