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Q. Aggregate demand in the IS-LM model?
Aggregate demand
Aggregate demand depends on Y and R in the IS-LM model
As investments depend on R and consumption and imports depend on Y, aggregate demand will rely on both Y and R. In cross model, we used notation YD(Y) for aggregate demand. In IS-LM model, we should instead use the notation YD(Y, R). Now We have
YD(Y, R) = C(Y) + I(R) + G + X - Im(Y)
It doesn't make much of a difference if we allow C and Im to depend on R as well, YD will rely positively on Y and negatively on R in any case.
It must also be clear that we can no longer determine GDP the way we did it in cross model. We can't successfully solve the equation YD(Y, R) = Y since we have only one equation and two unknowns (Y and R). We need one additional equation if we want to solve for both Y and R. This equation would come from the money market.
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article summary
a good is classified as inferior if a. consumers buy less when the price rises b. consumers buy less when the income rises c. consumers buy less when the price falls d.
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