ISLM Model Homework Solutions
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What do you mean by ISLM Model?
In a theoretical macroeconomics universe, there are two curves used. The Islm model or the Is-Lm curve represents the investments and the savings and is a type of income-expenditure model. The Lm curve is responsible for all the liquidity and the preferences depending on the economic condition of the country. It also focuses on the money supply equilibrium and the money available which is later used in investing.
This model is represented in the form of graphical representations of two lines which intersects in the first quadrant. The horizontal axis represents the national income or the real gross domestic product and is labelled as Y. The X-axis or the vertical curve represents the real interest and the different rates surrounding it.
The point where these two lines intersect is called or represents the short-run equilibrium point in the real and monetary sectors of the economy. This combination of these two graphical lines represents a unique combination of the interest rate as well as the real gross domestic product.
What are the characteristics surrounding this ISLM Model?
According to Keynesian economics, objects surrounding to this Is-Lm model is taken out for its unrealistic assumptions and the way it portraits the whole macro economy. This model of representing the economic factor cannot explain the tax factors and the spending policies. Also how they should be terminated or formulated according to the governmental issues are not exactly defined in this model.
On the other hand, it tells about the gross domestic product which increases as it stretches to the far left in the graph. Here are some of the major points which this Is-Lm curve is following. The points are listed below in certain points.
- This curve forms the schedule of combinations of the interest rates and the level of income acquiring in the whole economy and also in the good’s market.
- This curve is negatively sloped in nature since it causes an increase in the interest rate as it is planned for the investment spending nature. Therefore for the following reasons, the aggregate demand reduces after that lowering the whole equilibrium.
- The investments which are smaller in naturemultiplies and the lessor the insignificant investment spending is caused by the change in the rate of interest.
- The Is-lm curve/model is also changed with the change in the autonomous spending and expenditure in the economy. An increase in the expenditure causes the curve to shift to the right. A decrease in the spending by the government causes the curve to shift to the left.
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