All X v Y graphs are correlated - that is a math certainty and the ISLM is outdated, only works with a lot of assumptions which don't hold true anymore.(Original post by MagicNMedicine)
You haven't understood what I have said. This is not what I was saying.
This is like saying a supply curve plots the relationship between price and quantity, so a correlation exists. Yes - a positive correlation.
But also, a demand curve plots the relationship between price and quantity, so a correlation exists. This time it is a negative correlation.
When there is a correlation like this, for every value of one variable there exists a unique value of the other variable, and the correlation allows you to work that out. So in supply where there is a positive correlation, for every P there is an associated Q, and Q rises as P rises. With demand there is a negative correlation, so for every P there is an associated Q but Q falls as P rises. So when you are looking at an interaction between supply and demand, there will be one unique P,Q combination that satisfies both. This is equilibrium.
The ISLM is the same principle.
IS is going from i to Y. It tells you that as i increases, investment will fall, and as investment influences Y, as i increases, Y falls. So it is downward sloping like a demand curve.
LM is going from Y to i. It tells you that as Y increases, demand for money increases, and so in the absence of changes in money supply, the interest rate that brings the supply and demand of money into equilibrium increases. So as Y increases, i increases. Hence it is upward sloping like a supply curve.
At every value of i, there exists a corresponding value of Y that satisfies equilibrium in the goods market, because investment is usually financed by borrowing and lower interest rates create more investment. That set of equilibriums runs all the way along the IS curve.
At every value of Y, there exists a corresponding value of i that satisfies equilibrium in the supply and demand for money. That set of equilibriums runs all the way along the LM curve.
The goods market and money market will come into equilibrium simultaneously at a unique i,Y combination, just like demand and supply will come into equilibrium at a unique P,Q combination.
Then in the same way as exogenous shifts in demand or supply curves will change that equilibrium point, exogenous shifts in the IS or LM curves will change the equilibrium in the ISLM model.
Sheesh, the so called experts here are making me laff. jokers
IS/LM oudated and flawed ? Watch
- Thread Starter
- 19-01-2013 14:51
- 19-01-2013 15:32
What's the point of creating a thread if you're going to dismiss the correct responses and stick with your silly, uneducated point of view? MagicNMedicine has been very helpful here and provided a good explanation. And you are refusing to acknowledge it and, more than that, you're being rude. You might as well have saved him the time and titled this thread "This is my naive view on something I don't really understand. Please don't help me, I'm a lost cause. Thank you".