IS-ML Model Study
The IS-model refers to an economic concept that is used in the analysis of the aspects of the money market and commodity market. The initial IS stands for the relationship between the investments and savings in the commodity market and indicates the market forces that impact investments in a given economy against the savings. The rates of interest have great impacts on the way in which a population undertakes investments of its resources and the amount of money that they are willing to save. The initials represent the link between the money that is circulating in an economy and the liquidity with regards to the interest rates prevailing in the market. However, the money and commodity markets are analyzed together to indicate the market equilibrium since be behaviors of both markets are as a result of the dynamics of the rates of interest.
The economists are greatly concerned about the model and this is clear from the World Economic and Financial surveys and reports on the Gross Domestic Production (GDP), and the debt ratios of the developed and developing countries for the financial year 2013/2014. Taxation rates are regarded as the key issues regarding debts and productivity of those nations. The GDP is a means of measuring all the revenue that a country is capable of raising from all its economic activities, which include investments and savings. Money is a form of capital that acts as a factor of production, thus, the flow of money in a country is critical in regulating the processes of business in the countries mentioned in the survey like Japan, Brazil, China and Portugal among others.
The IMF ‘World economics and Financial surveys’ Taxing Times points out that a country like Japan has a debt ratio that is quite stagnant to a GDP ratio of 8%. The issue about the debt ratio can be solved through the money supply, especially for purposes of transaction. Money gives people the power to buy government bonds, thereby contributing income to the country. The state should utilize the LM model by giving the central bank, the mandate to issue more lending. Availability of the money required for transaction enables people to make investments in government bonds, thereby earning the government revenue. Spending is also done on consumption because the flow of money is efficient among the citizens. As this occurs, the interest rates increase, and income is acquired. When the rate of interest goes up, the incentive to hold money reduces so that there is capital that is not in use. The debt ratio is subsidized through empowering the buying and investment power to traders and other market players, thus growing the volume of business which in turn increases the GDP above the debt level.
Japan is still challenged by high tax rate for consumer goods, which is an implication that there is a negative impact in returns on investment in that particular field. The investment savings model points out that people should invest at high interest rates in order to earn better returns. When taxation is up, the interest obtained from the business is quite lower since a greater percentage of it is deducted in the form of taxes. Going by the sentiments of economists on the IS model, the government needs to cut down the taxation base so as to influence more people towards investments, thereby reducing idle money. The volume of the business gives the government little but constantly flowing tax from the investments, which can be helpful in dealing with the economic growth effectively in solving GDP to debt ratios.
Investment-savings and the money-liquidity preference principals can collectively be instrumental in solving the problem outlined in the survey report. A combination of the IS-LM model provides equilibrium of interest rates among other economic factors like taxation to regulate a country’s economy.
IMF. 2013. “World economics and Financial surveys.” Taxing times: IMF > ( February 20, 2013) <http://www.imf.org/external pubs. 55123115,d.bGE.
Young, Warren, and Benzion Zilbafarb. IS-LM and modern macroeconomics. Boston: Kluwer Academic Publishers, 2000.
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