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IS-LM Model

Keynesian macroeconomics — goods & money market equilibrium, fiscal & monetary policy effects

Macroeconomics Keynesian Fiscal Policy Monetary Policy

Gov. Spending G 200 Money Supply M 800 Tax T 150 Investment sens. b 30 Money demand h 40 Price level P 1.0

Y* = — r* = — % Fiscal multiplier = — Crowding-out = —

IS-LM Framework (Hicks, 1937)

The IS curve (Investment-Saving) represents goods market equilibrium: all (Y, r) where planned expenditure equals output. r_IS = (A − Y·(1−c₁)) / b where A = C₀ − c₁T + I₀ + G (autonomous spending), c₁ = MPC, b = investment sensitivity.

The LM curve (Liquidity-Money) represents money market equilibrium: money demand L = kY − hr equals real money supply M/P. r_LM = (kY − M/P) / h. Equilibrium Y*, r* is where both curves intersect.

Use the shock buttons or drag the sliders to see how fiscal and monetary policy shift each curve and move the equilibrium point.