The IS-LM model is a classic Keynesian macroeconomic model that means “investment-savings, liquidity preference-money supply.”
Like your classic supply and demand graph, the IS-LM model is a graph with two intersecting, diagonal lines—one being IS and the other LM. The model shows the relationship between interest rates and the real output of goods and services plus money market.
The IS-LM model is really more concept and theory than actually used by macroeconomists. Yet it helped lead the way, as Keynesian economics is the core of modern-day economy policy for the U.S., as well as for many other nations. Yep, Keynes is still king.
The IS line theorizes that interest rates affect investment, which affects real GDP. The lower interest rates are, the higher investment will be, and the higher GDP should be. The LM line theorizes that the more economic activity there is, the higher demand there is for liquidity (for spending money).
Where these two lines cross shows the equilibrium where the economy is stable in terms of real GDP (x-axis) and interest rates (y-axis). The central bank can choose to affect things like interest rates and the money supply, which can change the lines, and thus where the equilibrium point ends up. This is how central banks try to tinker to soften economic recessions and boost the economy.
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Econ: What is the Wealth Effect?0 Views
and finance Allah shmoop What is the wealth effect All
right people when your stock portfolio is climbing like that
little mountain climber guy on the price is right you
just might feel like yodeling for joy Or maybe you
just dance a little either way that happy feeling is
caused by the wealth effect with wealth Effect is in
economic theory which states that people spending habits correlate with
the ups and downs of their unrealized well like stocks
and investments in real estate In you know owning your
own home When your stocks are on the upswing you
might find yourself spending thanks to a newfound economic confidence
a new appliance here you know a new TV there
Yamagata It also means that when economic doom and gloom
arise from the ashes of ah burst housing bubble for
example causing your house's value to tumble down words well
then you'LL start spending less Maybe you'LL start eating at
home for lunch more often and maybe we'LL postpone that
trip Teo Tasmania wherever people go in an aggregate sense
the wealth effect suggests that consumers are spend happy during
bull markets and that they go into defense of savings
mode during bear markets right kind of makes sense Well
Wealth of act might affect us mere mortals but it
wouldn't affect *** economicas The theoretical perfectly rational economic agent
Po Mo Economicas would see that because this wealth is
yet to be realized it's no reason to change spending
habits Stock prices that went might fall again before you
cash them in and it's likely that the housing bubble
won't keep housing prices down forever Yet we real humans
with our monkey brains can't help feel the excitement that
comes with rising investments in the fear that comes with
falling investments Of course if an investor was living off
of well his or her dividends while those dividends would
be the source of their income right the cash the
Levant which is more of an income effect thing than
a wealth effect thing Either way the wealth effect is
wound Just a theory some economists point to It is
a way to explain some peculiar economic event For instance
a ten percent tax increase in the late nineteen sixties
did not stop consumers from spending like it was payday
every day grabbing That's a stock portfolio bull by the
horns while politicians and economists like we're baffled and they
ruffled Well that's not how this was supposed to go
another economist shout here say calling the wealth effect a
bunch of hooey Like a bad theory it doesn't mean
anything They say that the wealth effect is upside down
That increased spending probably leads to asset or investment appreciation
not vice versa Still other economists say that even if
the wealth effect is a really thing well it has
such a teeny tiny effect on the economy That is
kind of a moot point in the aggregate To spend
or not to spend That is the question to check
your portfolio or not That is another question Well what
would *** economicas dio Yeah let's do what he does
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