UNEMPLOYMENT

INTRODUCTION

 

Unemployment rate is said to be eliminated by means of operations of market forces.  In this paper, the use of a macroeconomic model specifically the Investment/Saving equilibrium / Liquidity preference/Money supply equilibrium (IS/LM) model, will be tackled in lieu to the dealings of unemployment.  A brief outline of this paper would provide a brief history of the IS/LM model, an illustration and overview of an IS/LM diagram and how each one operates, and the presentation of the IS/LM dynamics.

 

 

MAIN PART

 

The history of IS/LM model started its roots in the Econometric Conference in 1936, as being pioneered by  , , and  that attempts to summarize major ’s idea in his General Theory of Employment, Interest, and Money.

Diagram 1: The IS/LM model

                        

The IS curve moves to the right, causing higher interest rates and expansion in the “real” economy (real GDP). Accessed at

To begin with, it would be appropriate to identify the particular labeling in the graph to better explain the diagram. The horizontal axis (Y) pertains to the gross domestic product (GDP) whereas the vertical axis (R) is representative of interest rate.  Collectively, the graph would comprise the interface between the real GDP (product markets) and the monetary market aspects of an economy.  The IS schedule exhibits a negative slope that is why it is drawn downwardly, wherein it is used to illustrate the equilibrium in the product market, the total spending equaling an economy’s total income output.  An explanation of the exhibited negative slope IS would be an assumption that, an increase in income, the increase of consumption, savings and tax revenues follows.  The occurrence of equilibrium is said to occur due to the fall of the interest rate, thus, if there is an income increase, it necessitates the accompaniment of decline in interest rate.  Contrary to IS, the line LM schedule is exhibits a positive slope and is drawn upwardly as it constitutes monetary and finance roles.  An explanation of the positive slope of LM is the assumption of the rising GDP; the equilibrium causes the interest rate to rise.

The point of intersection between the IS and LM schedules will exhibit the short-run equilibrium in the GDP (Y) and interest rate (R) axis. When there is a balance in the product markets and money markets, they are indicative of the occurrence of the IS/LM equilibrium.  Moreover, an illustration of an equilibrium of the IS/LM model is illustrated in diagram 2 found below.

 

Diagram 2: The Equilibrium of IS/LM model

                                    

In figure 4.3 of the book : A Study of the ().

The nature of economy does not move abruptly when necessary changes is required.  Thus, the IS/LM model moves in dynamic motion or we can call it as the dynamic of adjustment that occurs as a result of adjusting to one equilibrium to another.  The adjustment path where the course of y and i axis turns into draws three assumptions wherein the first two assumptions deals with the adjusting variables to a certain market.  First, assumption holds that rise of income and output implies the excess in the demands for goods and services (presented by the horizontal arrows in diagram 3 found below) wherein, it moves from the right to the left of IS curve and moves from the left to the right of IS.  Second, assumption states that, there is a rise in the interest rate, it is said that there is excess demand in the money market that implies that below the LM curve, there would be an increase in the interest rate while the supply in the money market excess represents the points above the LM curve and necessitates a drop in the interest rate.  It is presented in the vertical arrows of diagram 3.  The last assumption of the dynamics of IS/LM is the adjustment of the interest rate which is faster than the income and output adjustments.  The initial interest rate is too huge to be consistent with the new equilibrium; therefore, the final overshoot target should be corrected through partial reversal of the interest rate movement that would likely be the valuable implication of the third assumption.

Diagram 3: Dynamics of IS/LM model

 

                              

In figure 4.4 of the book : A Study of the  ().

 

 

CONCLUSIONS

 

            The operating variables under which IS/LM operates may be readily identifiable but its operations indicates the complexities of understanding the whole IS/LM model.  An increase in income, consumption, savings and tax revenues causes the negative slope of IS, whereas the rise of GDP to attain equilibrium, increases the interest rate.  The three assumptions of the dynamics of IS/LM model explains the adjustment process the IS and LM would partake.

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