The IS model is going to be the first major piece of the Macroecons puzzle that you will be learning today and I hope you’re excited about it! We will be dealing a lot with this curve in the rest of the unit and once you’ve mastered this curve, I can assure you that you will find the rest of Macroecons very easy and fun to learn!
So far, we have looked at the goods market and managed to find the equilibrium output given certain expenditure habits of the economy. We have also seen how we can find the equilibrium level of INVESTMENT given a certain level of private (Household and Firms) savings, public (Government) budge, and net exports. That was just an alternate way of looking at the equilibrium of the goods market! The main way would be the IS function.
The IS function stands for Investment & Savings function, which is a:
It is necessary for us to understand how the IS model works because combining it with the Liquid Assets Market or LM model, which you will learn in the next video, will give us the interest rate level that will ensure equilibrium in BOTH the goods and liquids assets market. Just like demand and supply, the economy is also moving towards some kind of equilibrium and by understanding how the ISLM model works, we can make some sort of prediction about what’s gonna happen to the economy!
At the end of this video, you should be able to:
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