ISLM Model

  

Categories: Financial Theory, Econ

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 are National Savings?1 Views

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And finance Allah shmoop What Our national savings The term

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national savings refers to the total of all private and

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public savings in a country All the money socked away

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for you know that rainy day you get your monthly

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paycheck you pay your rent you buy food and shell

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up cash for your utilities your Internet service your phone

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a few trips to the go kart track and maybe

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buy your mom flowers for her birthday Well at the

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end of the month you have twelve dollars seventeen cents

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a left That goes into your savings account the same

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starter savings account you first opened when you were twelve

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Well that twelve dollars seventeen cents also gets counted in

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the national savings total Well your twelve dollars seventeen cents

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gets added to the one hundred million dollars or so

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that a hedge fund manager made and paid himself for

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basically pushing people's money around and taking a big fat

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fee for it So he keeps that money That's his

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savings And then you have all the other money saved

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by people in companies and governments in the country They

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all get added up All of that dough is totaled

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two comprise the national savings well in practice The national

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savings figure isn't calculated by adding everyone's bank accounts Jeff

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Bezos Finances are much more complicated than those in York

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you know junior savings account which still entitles you to

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a lollypop with every deposit It might be hard to

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get a firm grasp on just how much money Bezos

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has saved a pay for the eventual vacation community on

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the moon he plans to build with Ellen Moscow actually

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may be the new one is going to be built

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on Mars What do you think Well getting those savings

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numbers may be difficult to get Teo because well for

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Bezos and Musk most of their wealth is in stock

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It hasn't been converted to cash savings so it just

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sits there and it goes up with the market or

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a little better than the market these days anyway Meanwhile

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other people are burying cash in Mason jars in the

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backyard In case you know the zombie apocalypse comes back

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and all the bank's just go away or shut down

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we're getting a good estimate on these totals in total

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savings numbers is difficult So instead of adding up all

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the savings account totals National savings is calculated a different

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way Instead the figure is computed by taking the amount

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of money people earn in a period when just subtracting

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the amount they spend Yes very clever Well people either

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spend or save their money That's the assumption here What

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they didn't spend well they must have saved right Well

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in terms of an equation national savings equals disposable personal

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income minus personal consumption expenditures That's the big equation Well

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disposable personal income represents the amount left over in people's

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paychecks after they pay their taxes The amount they have

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available to spend or save is you know what's left

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well Meanwhile personal consumption expenditures represent the spending total The

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difference between the two Well that's what's been saved when

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comparing country's national savings is given as a rate like

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big countries will always have a big total for savings

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but it doesn't mean that they're good at saving So

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to compare you need to compute a rate of savings

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So for that computation to take place you take the

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amount saved and calculate the ratio of that number with

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the country's GDP That figure then gives you the national

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savings rate Some countries save a lot Others say very

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little So you know on one end of the spectrum

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you've got the Singapore here It had a national savings

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rate of Yes forty six point five percent of GDP

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in two thousand seventeen Close toe Half of the money

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earned in the country went to savings on the other

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end You've got grease Hello Bankrupt Greece Yes we feel

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your shame Savings rate of only ten point nine percent

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in two thousand seventeen Little over ten percent of the

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money earned their got saved Meaning Just under ninety percent

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of it got spent as soon as it arrived Well

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the U S is a lot closer to Greece Sadly

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on the list it's gross National savings rate told seventeen

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and a half percent in two thousand seventeen And before

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you start yelling at your family at the next Thanksgiving

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about how they need to save more the low savings

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rate is largely the government's fault Yes White House We're

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looking at you National savings includes government figures Well part

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of the issue for the U S is that the

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federal government runs a heavy deficit mat number that spend

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leaps into the overall savings rate for the country for

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the federal government ran a deficit of six hundred sixty

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five billion dollars in two thousand seventeen cost us a

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fortune and it had taken off a lot of our

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twelve dollars seventeen cent deposits into our junior savings account

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Tio you know cancel all that huge government debt out

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So what We just eat it That's it National savings

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