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In order to construct the IS – LM model for a simple economy, what assumptions will be held?

In order to construct the IS – LM model for a simple economy, what assumptions will be held?

Answers

Wilfred
1. IS – LM does not consider price changes and how they might affect aggregate demand and supply in the economy.
2. Consumption is affected by income alone.
3. Investment is a simple function of the rate of interest with profit expectation and the
cost of capital equipment assumed to be constant.
4. Money wage is constant and prices are constant the real wage is also fixed.
5. Consideration of opening economy is assumed away i.e. export and import nonexistent
6. Government role in form of fiscal sector is ignored meaning government spending and taxation is assumed away.
Wilfykil answered the question on March 8, 2019 at 11:42

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