Jan. 26th, 2012

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My understanding of economics is so primitive that I don't even have a good idea of what I need to know but don't. But beyond the basic "supply and demand" stuff, I'd say the crucial concepts one needs to understand right now are (a) cumulative advantage and (b) IS-LM curves. The first I grasp so well — or think I do, anyway — that I wrote about it for the Las Vegas Weekly. But the latter is something I'm not yet close to understanding. I gather it's a critically important technical elaboration on one of Keynes' most crucial ideas and that it's a model that reconciles two apparently contrary stories of what determines interest rates ("reconciles" may be the wrong word: the IS curve gives you one set of possible interest rates, the LM curve gives you another, and where the two intersect is where you'll get your interest rate). Also, it's a model, not a law, but it's one that helps us understand the situation we're in — except that I'm not yet one of the "we" who understand it.

Paul Krugman wrote a blog post last October attempting to explain IS-LM to people like me ("IS-LMentary"), but the explanation still contained too many ellipses — too many points I needed explained further, or at least that I hadn't yet been able to see into. My greatest difficulty was with his explanation of the LM ("liquidity-money") curve. I've bolded the two sentences that were just too condensed for me. If there's anyone who would like to walk me through them real slow, pointing out all the notable sights and features, please do so. Or maybe you could direct me towards someone who can explain this more thoroughly than Krugman did in that post. (I assume it's in some textbooks; but also, if Krugman can't explain it easily, it's probably not easily explainable — not to me, anyway.) Krugman:

In that case, the interest rate must be such as to match the demand to the quantity of money )

I'm not understanding the word MUST )

The world keeps going rectangular )

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Frank Kogan

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