IS-LM-PC Analysis
The IS (Investment Saving), LM (Liquidity Preference- Money Supply), and PC (Philips Curve) is the model that looks at the dynamics of output and inflation. It takes into account the central bank policy decision to adjust the inflation and real interest rate in the economy. It enables the economist to weather to priorities between employment and inflation rate analyzing the model. It is a practice-driven approach adopted by economists worldwide.
IS-LM Analysis
The term IS stands for Investment, Savings, and LM stands for Liquidity Preference, Money Supply. Therefore, the term IS-LM model is known as Investment Savings – Liquidity preference money Supply. This model was introduced by a Keynesian macroeconomic theory which shows the relationship between the economic goods market and loanable funds market or money market. In other words, it shows how the market for real goods interacts with the financial markets to strike a balance between the interest rate and total output in the macroeconomy. This particular model is designed in the form of a graphical representation of the Keynesian economic theory principle. The output and money are the two important factors in an economy.
What is money? Explain the definition in terms of the functions of money?
Money is anything that is generally accepted by the people in the economy and used for the purchase and sale of the goods and services in the market of the economy. In the ancient periods, the precious metal coins were used for the transaction of goods and services in the economy and the economy accepted those metal coins for the goods and services which made them the money. Before the coins, the commodities were exchanged for other goods and services in the market and that system was known as the Barter system. Thus, money was any commodity which was widely accepted by society as a medium of exchange in the market.
There are three main functions of money and they are as follows:
The primary function of money is the medium of exchange. Money acts as a medium of exchange between the seller and the buyer in the market. It helps to resolve the issue of double coincidence of wants in the market which was the important restriction faced by the Barter system of trade.
The second function of money is the measure of value. Money is used to compare the values of similar as well as dissimilar products in the economy. This helps to sell any product in the market and purchase any commodity from the market with money as it helps to measure the value of all the goods and services in the economy.
Another important function of money is the store the value. Money can be stored for a longer period and can be used at any time for the consumption of goods and services in the market. This ability to save and use at any point in time is the important function of the money.
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