The equation for the IS curve is given as
Y=co+bo+G bl i
and that for the LM curve is given as
i=- mo- P +mlYl
where Y is income, i is the rate of interest, Pis the price level, Ms is money supply and
G denotes government spending.
Further, l1e-t 011(1- t) = X. Then the expression for the aggregate demand function and its slope will be?
how to approach such problems ? someone please give the explanation .
usual AD slope is negative, observe coefficients between Y and i of the IS and LM relations. They are negative and positive respectively. So we definitely have the usual case. Substitute lamda in the IS equation.
Now either (a) or (c) should work as AD has negative slope. to find which one, simply plug in the i value from LM into the IS equation. Solve for Y and you will see its (c).