Analysis using IS-LM model - Article Example

Analysis using IS-LM model The investment–savings/liquidity–money supply model to de the close relationship between interest rates, which are prevalent in an economy, and the real output of the economy1. The output of an economy is measured by the amount of goods and services that are produced during an economic period. The two different connections are used to measure the performance of the economy, and any improvements or losses that have been incurred. Therefore, the use of the classical theory of the IS–LM curves would be used to measure the performance of an economy in regard to interest rates savings and liquidation.

These are considered to be the vital ingredients of an economy; therefore, a change in each would lead to an effect in the economy, as either an economic turmoil or a positive encounter.According to the Globe and Mail, China has been on the frontline in making an economic improvement in each subsequent year. The country has been improving in its economy with each passing year, growing to be the second world’s biggest economy. This is a positive approach to the country’s economy, as it has stipulated methods of growth.

Since 2009, the country has recorded its ever first lowest decline in economic growth. The country’s economic growth dropped from an average of 8.1% to a low of 7.6%. This was an occurrence that proved that the country’s economic growth would further deteriorate if not approached with the best economic measures. The economy had to encompass economic strategies that would revive its economic growth to a better position, just like the previous years. Therefore, the second biggest world’s economy would have to improve its approach towards economic growth to resuscitate the economic turmoil.

The economic redundancy in the china republic could be explained by the IS-LM curve in a number of ways, which are closely related to the economy. First, the economic decline was forced due to the stagnant real estate investments. Many people had acquired investments in real estates, with a focus of making an increase in their investments. In many countries, real estate is considered a highly viable investment. Therefore, many people have been compelled o increase their investments in the sector, including the china economy.

However, the supply for real estate escalated, while the demand remained the same. With such a prevalent situation in the market, there were little tradeoffs between the real estate owners and the buyers. This led to a reduction in the interest rates as most of the owners had to reduce their pricing on the real estates. Therefore, the economy was gaining little in regard to the charged interest rates, thereby losing a lot of economic muscle. This is the same problem that occurred during the world economic crunch, which affected the whole world in terms of economic stability.

The other problem that occurred in the Chinese economy was instigated by the lack of credit flow. Since many people had invested in real estates, there was little flow of money. The money in the economy was tied to real estate, thus depriving it of free flowing cash2. Therefore, the investors had solid cash in terms of real estate, yet it could not be liquefied. According to classical economists, an economy only benefits when there is an increase in money circulation, due to the rising interest rates.

This is a strategy that increases the value for money, thereby increasing the economic growth.Lastly, the Chinese economy recorded a drop in the economy due to the increase of imports from Europe, while there was low consumption of domestic products. Since most of the natives have invested in their own economy, there should be increased consumption of domestic products3. This would increase in the interest rates that are garnered in the economy. However, reliance on exports from other countries reduced on the economic growth.

This is due to the interests rates that are forwarded to the exporting countries. In conclusion, China should concentrate on domestic spending, which would increase interest rates garnered in the economy.Reference ListNick Edwards and Kevin Yao. China’s economy cools, shows need for policy action. The Globe and Mail. Retrieved July 13, 2012 from Benzion Zilberfarb. Is-Lm and Modern Macroeconomics. New York: Springer. (2000).