I mentioned these once before. Now, I'm starting to contribute to the library of demonstrations. My first contribution is a simple Keynesian IS-LM model. I chose this for my first attempt as it was easy to code and could be widely used in classroom presentations. Granted, I don't make the IS-LM the centerpiece of my class, but it does have some value and students should know what it is.
If you teach macroeconomics, you might want to try it out. It requires the Mathematica version 6 player (free download). Here's a link to the demonstration. Here's a link to all the economics demonstrations. And this is what the interface of my IS-LM demonstration looks like...
Please let me know if you find it useful. I hope to do some more of these in the near future.
IS-LM? Whyyyy?!
Actually I did it just to frustrate you. :)
But seriously.
Your sentiment is appropriate for a beginning Ph.D. student. In fact, it is a sentiment I shared. In those heady days, I saw the IS-LM in probably every single intermediate level macro text in print--even Barro's text, which was the standard for the true neoclassical professor in the early/mid '90s. "Why?" I thought.
And at that stage of my learning, it was a good question to ask. After all, my graduate career hinged on my ability to decipher models that started with "Let the representative consumer have preferences give by the utility function, U(c(t)),...." I learned those lessons well.
But maybe 5% of my intermediate level students will go on for a Ph.D. Maybe 1/3 of my M.A. students will go on for a Ph.D. For most of my students who will go on to careers in banking, real estate, market research, and so on, the mathematical gymnastics I busted my tail to learn are not what they need to do their job or understand the macroeconomy.
So I show them IS-LM as a part of a comprehensive approach. I tell them my reservations about it, but I put it out there for historical and practical reasons. Admittedly, I would say that inertia is part of the reason for it. Most of the rest of the profession teaches it. Therefore, even students who are being taught other models should know what it is. Inertia is a powerful thing. The IS-LM isn't going to disappear from the textbooks for quite a while.
But don't worry. I don't make it a centerpiece in my own classes. But by the same token, I cannot justify ignoring it. It does have some important lessons to teach novice students--both in what is good about it and what is not so good.
Plus, it's a pretty good way to showcase the capabilities of the Mathematica Demonstration platform and what it can do for university level economics pedagogy.
Frustrating you was just a bonus. (Just kidding) :)
Wow. What a nice suite of applications. And your IS-LM demo does a nice job of showing how the model reacts to changes in parameters. (Not that I've taught the IS-LM model for years now, but this may lead me to incorporate it if I ever teach intermediate macro again.)
Thanks, Don.
Discussions of interest, especially short-term rates, are usually couched in terms of the “money market”. As long as this is just a “street-wise” expression confined to the business community, no harm is done. Unfortunately, under the influence of the Keynesian dogma, academicians have been trying for too long to analyze interest rates in terms of the supply of and demand for money.
A “liquidity preference” curve is presumed to exist which represents the supply of money. In this system interest is the cost which must be paid, if lenders are to forgo the advantages of liquidity. All of this has little or nothing to do with the real world, a world in which interest is paid on checking accounts.
Interest, as our common sense tells us, is the price of obtaining loan funds, not the price of money. The price of money is the inverse of the price level. If the price of goods and services rises, the “price” of money falls. Interest rates in any given market at any given time are the result of the interaction of all the forces operating through the supply of and the demand for, loan funds.
Loan funds, of course, are in the form of money, but there the similarity ends. Loan funds at any given time are only a fraction of the money supply --- that small part of the money supply which has been saved, and is offered in the loan credit markets.
Unfortunately, Keynesian economists have dominated the research staffs of the Fed as well as the halls of academia. While monetary policy is formulated by the Federal Open Market Committee (FOMC), monetary procedures are determine by the “academic” research staffs. In their world, high interest rates are evidence of “tight money”, low rates of “easy money”; and, a proper rate of growth of the money supply is obtainable by manipulating the federal funds rate. Consequently, to bring interest rates down the money supply should be expanded and vice versa.
Your equation is worthless
^^Wow^^
The Mathematica Player wouldn't install on my Vista system, but the demo at the website looked interesting. The IS/LM model is one of the most nebulous conceptual exercises for non-econ MBA folks. I was an econ major, and it was never a favorite of mine, although the underlying theory is important to understand.
I wonder why it wouldn't install on Vista. We've got a Mathematica representative coming to campus on Friday. I'll ask him if he's aware of any problems.