Contents

If you have never heard of IS-LM model click here.

Freely modifiable MS Word version of the graph.

Data for all the variables in IS-LM model

5.The advantages of this representation

This graph representation has two groups of the advantages:

1. practical advantages for students and practioners;
2. theoretical advantages for economists and business cycle analysts.

In the first group, one can underline that this representation is quite compact, reducing three or four diagrams to unity in one page. Once accustomed with conventions, the reader can easy navigate the graph.

Our experience shows that students, in long reasoning and causal chains, tend to lose their direction and to describe the final effects on a variable just guessing out whether it will grow or falls. By contrats, thanks to this graph, the sequence will be understood with no mistakes or guesses.

Depending on the depth of knowledge, the verbal suggestion required in reading the scheme can range from a simple statement directly arising from the graph up to elaborated weighted argumentation on sources, justifications and effects of complex dynamics.

The lack of mathematical difficulties is particularly suitable to keep reader's attention high on economics, not on formal geometric devices.

In a theoretical perspective, the graph representation is:

a. compatible with equilibrium theory;
b. open to non-linear dynamics;
c. suitable for disequilibrium processes with endless fluctuations.

The notion of general economic equilibrium is unnecessary for interpreting the graph.

Similarly, the graph representation is:

a. compatible with linear relationships between variables;
b. open to non-linear relationships (e.g. quadratic);
c. suitable for non-parametric processes.

Moreover, the graph allows an easy introduction of new variables (e.g. oil price for influencing the price level).

Similarly, it is easy to introduce new links as well as new directions of influence.

Please note that the model is particularly suitable to analyse situations with more than one shock at a time. This also means that is possible to start not from a motionless steady state but from an autonomously evolving system where a certain policy action is taken, to evaluate its potential effectiveness.

Last but not least, this representation can be developped as a scheme for computer simulations that generate time series to compare with real world ones.