IS/LM
...sounds to me like it should be part of a tobacco pitch, but apparently not. Some of you may recall that I'm something of a student of the Austro-Bahamian school of economics, as exemplified by the writings of its foremost exponent. Of course his works are occasionally a bit cryptic, even Derridesque , perhaps. Anyway, he recently trashed the famous IS/LM model , which made me think that if it's that bad, I really ought to at least try to understand it. It seems that the model is actually two curves, often drawn as straight lines, in a space that represents interest rates (vertical axis) and gross domestic product (horizontal axis), as above. Now if you suspect that econo-space might have more dimensions than two, just consider it a two-slice of that hyperspace. The two curves represent hypothetical equilibria, with the participants being S, the propensity to save; I, the demand for investment; L, the so-called liquidity preference; and M, the money supply. The worki...