IS–LM Model
What is IS–LM Model?
A model of how interest rates and output are jointly set by the goods market and the money market.
Understanding IS–LM Model
The IS curve shows combinations of interest rates and output where planned spending equals output: lower rates raise investment, so output rises. The LM curve shows combinations where money demand equals money supply: higher output raises money demand and pushes rates up.
Developed by John Hicks in 1937 to formalize Keynes's ideas, IS–LM became the workhorse of intermediate macroeconomics. Fiscal policy shifts IS; monetary policy shifts LM (or, in modern versions, sets the interest rate directly).