Use the IS-LM model to discuss the Japanese stagnation period in the 1990’s. What mistake did Japanese policymakers make in addressing the stagnation period? What policies should have been used to stimulate the Japanese economy? Discuss any parallels between the Japanese experience in the 1990s and the economic experience in the U.S. currently?

In this chapter, the author furthers his ideas on the relationship between the real GDP and the interest rate, in relation to the IS curve. We had learnt that the IS curve gives numerous combinations of potential equilibrium points that do not ultimately give a definite answer. This necessitates the introduction of new variables that will help determine the relationship between interest rate and real GDP in relation to a single equilibrium point. As such, we shall note in the forthcoming discussion the introduction of an LM Curve, whose intersection with the IS curve gives the equilibrium point (Gordon, 2012).

In macroeconomics at a national level, the real GDP is a dependent variable on a number of different variables such as the population’s level of income, the interest rates offered on securities, and the demand for liquid money by the people. An important assumption that is used across the chapter is in regards to the stream of money into the economy which is determined by existing interest rates and income levels. We therefore can deduce that with every increase in income levels, demand for money goes up, and contrasting, an increase in interest rates offered by financial institutions, people will forego their monies for investing.

Nonetheless, the student should not restrict themselves to these two