IS/LM curve, Economics made easy.

ISLM model - Wikipedia, the free encyclopedia - Google Chrome_2012-09-25_16-52-57

The above is a standard IS/LM model. What it pretends to show is that there is an equilibrium between Investment and Savings on the one hand and Liquidity and Money on the other. Think of it as 4 variables interacting on each other to find an equilibrium. (This one is from Wikipedia). How it all works precisely can be found on the internet if you are interested. For our purposes now, it is important to see that in this (Keynesian) model GDP (Y) and with it employment grows as interest rates rise. One can quarrel about the dynamics and so on but this is the main lesson. The transfer mechanism is primarily confidence. This is what Charles Plosser of the Philly Fed said today in a speech. He is an academic having spent a lot of his time on studying business cycles in macroeconomic terms, having even written a textbook on the subject. He things his boss is barking up the wrong tree and is willing not to tow the company line (very Un-American) in the process. The beginning of the end of the Fed???