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.
1. Name & explain the three advantages of a monetary economy.
Introduction
A monetary economy is a system of exchange in which money is the primary unit of value. It is based on the principle that money can be used as a medium of exchange, allowing transactions between individuals and businesses to be completed quickly and efficiently. In a monetary economy, individuals, businesses and governments use money as a medium of exchange to purchase goods, services and labor. Money is also used as a store of value and as a unit of account. This means that it serves as a measure of value, price, and exchange rate between different types of goods, services, or labor. By acting as a medium of exchange, money facilitates trade, reduces information costs and increases economic efficiency.
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