Syllabus T. Y. B. A. Paper : IV advanced economic theory with effect from academic year 2010-11 in idol

Derivation of Aggregate Demand Curve 
In the following diagram, the change in equilibrium income due to 
shift of LM curve is shown with the introduction of the IS curve. 
1
E
2
E
2
E
1
i
2
i
0
0
RealMoneyBalance
Income / Output
1
E
1
LM
2
LM
Y
L Y
(A)
(B)
InterestRate
1
1
M
P
2
2
M
P

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IS
FIGURE 9.2: DERIVATION OF AGGREGATE DEMAND 
SCHEDUL 
In Panel A of the diagram, intersection of IS 
– LM is shown 
at E
1
showing simultaneous equilibrium in the goods and the money 
market. As price level falls from P
1
to P
2
, the LM curve shift to LM
1
and new intersection point with the given IS curve is E
2
. The 
equilibrium income shifts from Y
1
to Y
2
. 
Income level Y
1
is associated with higher price level of P
1
and income level Y
2
is associated with lower price level of P
2
. This 
relationship is shown in Panel B of the diagram, where price level is 
measured on the vertical axis and income level on horizontal axis. 
The two equilibrium position corresponding to E
1
and E
2
are shown 
in Panel B of diagram. E
1
and E
2
are linked to P
1
and P
2
1
Y
2
Y
0
Income / Output
1
LM
2