The IS/LM Model

Paper Summary:

The paper discusses the IS/LM model that was first invented by Sir John Hicks and has been used from 1937 onwards to summarize a major part of Keynesian macroeconomics. The paper explains how Hicks reduced the whole general theory of macro economy of Keynes to a set of equations and a single graph. The IS/LM stands for "Investment/saving equilibrium"/"Liquidity preference/Money supply equilibrium" and the curve describes the two types of actions that the government can use to influence inflation and unemployment. The paper discusses the numerous factors that influence the interest rates and explains that they have both positive and negative effects.

Outline:
Hypothesis I
Hypothesis II
Hypothesis III
Hypothesis IV
Conclusions

From the Paper:

"As mentioned above, the IS-LM model can be presented as a graph, where the horizontal axis represents the national income or real gross domestic produce (GDP) and the vertical axis represents the interest rate, r. The initials IS stand for "Investment/saving equilibrium" and the curve is used to represent the equilibrium in the product market (the total spending = economy's total income). The explanation of this curve is that every level of the interest rates will generate a certain level of planed investments, which are mainly related to the level of savings. In fact, an increase in the fixed investment raises the real GDP. Another short explanation of the curve suggests that a higher level of income is needed to produce a higher level of saving at a given interest rate."

Sample of Sources Used:

• "Advanced Macroeconomics", David Romer third;
• "America becomes global marketplace", Washington Times, 2005, pg. 15, Jeffrey Sparshott;
• "With Inflation Tamed, America Confronts an Unsettling Stability" Wall Street Journal, 2005, pg. 12, David Wessel;
• " America's recovery is not what it seems", Financial Times, 2005, pg. 34, Kurt Richebacher;
• "Rapid decrease threatens the US recovery", New York Times, 2006, pg. 23, Robert Scott.

More papers on The IS/LM Model:

• Essay # 85370 : "Closed-economy IS-LM Model"
• Analytical Essay # 133299 : "General Equilibruim Model"
• Research Paper # 47560 : "Economic Models"

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