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IS-LM Model for Economics Students

The IS-LM model displays the interaction between the market for economic goods (IS curve) and the money market (LM curve). It shows their equilibrium intersection which determines the short-run interest rates and output levels. The IS-LM model was devised by British economist John Hicks in 1937 as a graphical representation of Keynesian economic theory to describe how aggregate markets and financial markets interact to balance interest rates and total output. It can be used to analyze how changes in preferences affect GDP and interest rates, but lacks precision for economic policy prescription.

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69 views1 page

IS-LM Model for Economics Students

The IS-LM model displays the interaction between the market for economic goods (IS curve) and the money market (LM curve). It shows their equilibrium intersection which determines the short-run interest rates and output levels. The IS-LM model was devised by British economist John Hicks in 1937 as a graphical representation of Keynesian economic theory to describe how aggregate markets and financial markets interact to balance interest rates and total output. It can be used to analyze how changes in preferences affect GDP and interest rates, but lacks precision for economic policy prescription.

Uploaded by

KashfiaKamal
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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What is the IS-LM Model?

The IS-LM model, which stands for "investment-savings" (IS) and "liquidity preference-money
supply" (LM) is a Keynesian macroeconomic model that displays how the market for economic
goods (IS) interacts with the loanable funds market (LM) or money market. It is embodied as a
graph in which the IS and LM curves intersect to show the short-run equilibrium between
interest rates and output.

 The IS-LM model describes how aggregate markets for real goods and financial markets
interact to balance the rate of interest and total output in the macro economy.
 IS-LM was devised as a formal graphic representation of Keynesian economic theory.
 IS-LM can be used to describe how changes in market preferences alter the equilibrium
levels of GDP and market interest rates, but the model lacks the precision and realism to
be a useful prescription tool for economic policy.

Understanding IS-LM Model

British economist John Hicks first introduced the IS-LM model in 1937, just one year after
fellow British economist John Maynard Keynes published The General Theory of Employment,
Interest, and Money.

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