s asso ciated with differing income levels.
The IS curve and the LM curve are, in effect, schedules, which relate the income and interest rate variables. Both income and the rate of interest are determined by the point at which the two curves intersect. At this point of intersection, (1) investment and savings are in equilibrium, and (2) money supply and money demanded are in equlibrium.
The flexible rate currency exchange system was implemented in the early 1970s. Since that time, the foreign exchange value of the US dollar has been allowed to float. Although allowed to float, the US government attempts to influence its
4D. Bell, "Models and Realities in Economic Discourse," in The Crisis in Economic Theory, (eds.), D. Bell, and I. Kristol, (New York: Basic Books, Inc., Publishers, 1981), 46 80.
3international currency exchange value. Through September 1985, the maintenance of high real interest rates in the US, together with other actions taken by both the Federal Reserve and the Treasury, were efforts made by this country to maintain a high foreign exchange rate for the dollar. Since September 1985, actions have been implemented with a goal of lowering the fore ign exchange value of the dollar.
Although the high value of the dollar in international currency exchange attracted the foreign money the US required to finance its burgeoning and enormous governmental budget deficits without reigniting double digit inflation, it also exacted high costs in the domestic economy of the country. The balance of trade suffered grievously; jobs lost to other coun tries caused both unemployment and underemployment in the US to be far higher than should have been expected in a recovery; and real interest rates zoomed to record or near record highs. Both, unemployment and underemployment, and rising interest rates reduced the pool of families and individuals eligible to purchasing housing.
In August 1985, both...