Quo Vadis, “Investment” (I) or “Liquidity” (L)?
According to Paul Krugman , among other Nobel Laurates, the IS-LM is “a model of several interacting markets.” As he updates, “IS-LM stands for investment-savings, liquidity-money — which will make a lot of sense if you keep reading.” (“IS-LMentary.” NYT blogpost , 2011) Going for Details . With the above said, we quote among other Cambridge macroeconomists from N. Gregory Mankiw ( Macroeconomics , 8 th edition). I nvestment ( I ) as Demand for Loans. The quantity of investment goods demanded depends on the interest rate , which measures the cost of the funds used to finance investment. … The firm makes the same investment decision even if it does not have to borrow… but rather uses its own funds. … It slopes downward, because as the interest rate rises, the quantity of investment demanded falls. (pp. 63-4) Savings ( S ) as Supply of Loans . [This] equation shows that national saving depends on Y [as fixed by the factors of production] and the fiscal-polic...