In terms of business, the IS/LM model in macroeconomics can help in assessing the likelihood of higher sales revenue using macroeconomic data. This can be done by testing statistical relationships against revenue using time sequenced macroeconomic data as projected through the IS-LM model.
What the IS/LM model should reveal to you is where an economy stands in terms of income, savings, interest rates and investing. Moreover, the IS/LM model in macroeconomics illustrates the relationship between these variables and at what levels they are balanced and steadier. The IS represents income and spending, while the LM refers to lending and money supply.
What the IS/LM model should reveal to you is where an economy stands in terms of income, savings, interest rates and investing. Moreover, the IS/LM model in macroeconomics illustrates the relationship between these variables and at what levels they are balanced and steadier. The IS represents income and spending, while the LM refers to lending and money supply.
The IS/LM model is the convergence of two economic graphs, one representing income and savings (IS) and the other money supply and demand. Interest and income are key variables in both curves i.e. According to 'The Economics of Keynes' by Mark Hayes, in the IS curve, interest is the independent variable meaning it influences the dependent variable of income.
In the LM curve, income is the independent variable that influences interest rate. However, also according to Hayes, related independent variables proposed by Keynes, the famous economist are lost in the IS/LM model. Hayes states these independent variables to be consumption, liquidity and income. Yet despite this it does seem evident the IS/LM model includes liquidity as a bi-product of low interest rates, and consumption a result of higher income.
To illustrate it helps to look at a graphs and explanations of the IS/LM model in macroeconomics. When changes in one variable take place, reactions in the other occur. For example, if the interest rates for savings increases, so does income that can affect investment and spending or the demand for money.
When the IS curve shifts to the right it means conditions are more favorable for businesses because there is more income, and a higher demand for money which is reinvested. When the IS curve shifts to the left, interest rates have declined, personal savings decreases, and demand for money has declined.
In a sense the IS/LM model is an economic indicator if how interest rates and income relate to investments and savings on a scale of Gross Domestic Product (GDP) and real interest rates. The steeper the angle of the LM curve, the more dramatically interest rates are tied to demand for money.
The IS/LM model in macroeconomics is also used to graph the affect of government fiscal policy on income, spending and GDP. If government spending is affective, the IS curve should lead to higher interest rates, increased GDP, and a rise in spending and income which also corresponds to an increase in demand and cost for money.
Just because an IS curve moves to the right doesn't necessarily imply it will benefit a business because it is a macroeconomic model. Macroeconomic models aren't directly related to single economic entities or variables, but rather are a composite or aggregate metric of such.
Sources:
1. http://bit.ly/hMmjJ1 (Roubini and Backus)
2. http://bit.ly/dLNmSK (Berkeley)
3. http://bit.ly/hZJMpI (M. Hayes)
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