The IS LM Model Explained

The IS LM Model Explained With Diagrams

A key model in economics that assumes both the money supply and the (sticky) price level are fixed so that only the (nominal) interest rate can adjust to clear the money market. This is a Keynesian Macroeconomic Model so the prices are sticky. The IS Curve is essentially the same as the standard output demand curve. The LM Curve shows every possible combination of the interest rate and output for which the money market is in equilibrium. It is upward sloping because when output increases, money demand shifts outwards, and so a higher interest rate is needed to decrease the demand for money back to the equilibrium where the fixed money supply and the sticky price level meet. Therefore, an increase in output demand requires an increase in the interest rate to clear the money market. Here is the full economic IS LM model equilibrium shown with diagrams. See below the IS LM Model explained: