Given wage + price are rigid in Keynesian model., Aggregate demand =ADT= C + I + G, Qt
= ADt-1
, C=a + b Qt
(1-tax rate) . If Q & AD are constant, Q = (a + I) / (1-b(1-tax rate))
IS = f (G, tax rate) determining Q
LM = m(R,Q, P) , given P, determining R
Equilibrium level of output and interest rate in IS LM model determines AD. Changes in government spending, tax rate and money supply affect the equilibrium.
Since IS curve is independent of the price level,
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