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Q. What is Labor Market?
Labor market in the IS-LM model is the same as in cross model. Hence the IS-LM model is only applicable if profit-maximizing quantity of L would result in an aggregate supply that was larger than aggregate demand and aggregate demand will consequently determine L.
Once R and Y is determined, all the endogenous variables are concluded. The figure below demonstrates the determination of Y, R and L in IS-LM model.
Figure: Determination of Y, R and L of the IS-LM model
We start at top to the left and extend Y* down, through the 'mirror' at the bottom left, on to production function at the bottom right and then up to the figure representing labor market.
IS-LM is simply an extension of cross model in the sense that interest rate becomes an endogenous variable and we will be able to analyze how the interest rate is affected by changes in the economy. We could have developed IS-LM model directly, skipping the cross model as cross model adds nothing in relation to IS-LM model. The reason that most books start with cross model is entirely pedagogical. Cross model is much simpler as GDP can be determined from the goods market only as the solution to one equation one equation Yd(Y) = Y. Most students will probably find IS-LM model even more complicated had they not previously encountered cross model.
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