Thursday, October 24, 2013

ISLM is back

I am hoping that I never understand it. The green curve says when you lower interest rate I would rather spend the money, otherwise I save it. I think that is as far as I have ever really gotten. My reading is from Wiki. I never get far into LM. I could never figure out what the guys inthe yellow were selling that was different than the guys in the green. Wiki tells me rates are low when the yellow guys hold more cash. I think the yellow guys are finance. If output is high they will borrow money for higher rates. The figure shows a shift to the right of the greens. They are willing to spend? at higher rates. The yellow guys say, hey no problem, we can afford these borrowing costs.  This is an expansion.

A contraction would be the greens saying, hell no, we aren't paying for that junk, they save their money. The yellows say, hey, no problem, we can produce less at these rates.

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