The considered article is chosen from The Economist, dated 11th of August 2005 with the title “A working model” – Is the world experiencing excess saving or excess liquidity?
In purpose of this article is to present the understanding of IS-LM model in macroeconomics by these are the convergence of two economic graphs, one representing the income and savings (IS0 and other liquidity and money (LM).
In this article, author defines the so-called IS-LM framework aggregate macroeconomic model that has the intuition use to describe money and markets. The author has also focused on the role of IS-LM model and its relation with the interest rate, short-term rates, monetary policy and the unusually expansion of policies that have been amplified since long (Economist, 2005).
The author started off with the explanation of IS-LM model, was introduced by Sir John Hicks, has been pivotal in explaining the major parts of the macroeconomics and the interpretation can be thoughtfully represented by a graph. The initial IS-Lm theory concludes that the government has the power to influence on the economy through a rightward shift in the IS curve by the fiscal policy or by the shift of the LM curve in the monetary policy.
Generating the IS curve
The initial for IS stand for “Investment and saving” and the curve graphically shows the interconnection between the interest rate and the output from demand (Chiba & Leong, 2007).
Figure 1: Increase in interest rates reduces consumption and investment
The author tried to explain the deviation of the IS curve that is from the dynamics of the aggregate definition of demand function Y=C+I+G, where (Y) output is equal to the consumption (C), income is represented by (I) and the expenditures by the Government is denoted by (G). A slight modification is made in this model equation to incorporate the interest rate that entails making consumption and investments a function of the interest rate, Y = C(r) + I(r) + G. This theory in practical has been practically shown in...