Applying The Is-Lm Modelcurrent Events Case Studies Examples

Published: 2021-06-18 05:47:44
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Category: Finance, Investment, Canada

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The article talks about that Honda Power Company is spending $750 Million in its Ontario based plant. In return the Ontario government will share the 10 percent in the investment cost Honda’s development effort to develop a new car.
The reason given in the article for the government giving backing to this investment is that fact that recently a giant in the industry, Ford Motor Company has shut down its operations resulting in the loss of 300,000 jobs in the Canadian economy.
The article talks about that the auto industry is declining in Canada due to the stronger exchange rate of Canadian Dollar. Similarly, the recent decision of the union working in the USA to allow the companies to not pay the healthcare cost of retirees has also made the Canadian workers and industry uncompetitive. The companies are therefore moving towards other options like Mexico, and India where they can enjoy lower wage rates, as compared to the Canadian industry which has become extremely uncompetitive due to rising costs.
The Canadian government has therefore promised an investment of around $85.7 million for the innovation and upgradation of the plant. It will consist of two assembly line and will employ over 4000 workers. This is a good news for the Canadian automobiles industry, as the government itself is taking initiative to improve the overall picture of this industry. The investment that has been promised by the government is going to bring radical changes, and will also lead to multiplier effect in the economy, and the overall result of this investment will be positive.
The IS-LM model or Investment-Saving-Liquidity-Money-Supply) model is an important macroeconomic tool to determine the effects of the investment in the economy. It tells the users of this tool that how much money will be needed to create the multiplier effect that will uplift the economy.
There are two curves in the model. IS curve is a downward sloping curve. It shows the level of output on x-axis and interest rates on the y-axis. The relationship between the two is negative or downward sloping. Any increase in interest rates in the economy leads to lower levels of investment and reduction in the total output. The second curve in the model is the LM curve it shows the demand of money and interest rate levels. It is an upward sloping curves and signifies that the money supply in the economy rises with the interest as there are more freely available funds as people prefer to save.
The result of the investment by the Canadian government will result in IS curves move towards the right. The investment is a fixed amount and will go through at whatever rate of interest in the economy. Hence, there will be a rightward movement in the IS curve. LM curve will remain unchanged because of no direct impact on the liquidity preference of the overall economy. The end result of this movement of the curve will be overall increase in the interest rate levels in the economy, and an increase in the national output of an economy. More employment will occur because more people will be needed to meet the increased demand of national output. As a result, the overall result of this investment will be profitable and it will kick start the economy.
Investopedia,. 2009. 'ISLM Model Definition | Investopedia'.
McKinnon, Judy. 2014. 'Honda To Invest About $750 Million In Ontario Plant'. WSJ.

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