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IS-LM model


A model often used as a representation of the main concepts in Keynesian economics. The IS curve represents combinations of national income, Y, and the interest rate, r, that ensure equilibrium in the commodity market. The LM curve represents combinations of Y and r that ensure equilibrium in the money market. The intersection of the IS and LM curves determines simultaneous equilibrium in the product and money markets. The model can be used to predict the effects of parametric changes (for example, an increase in government spending or in the money supply) on the economy. The IS and LM curves capture Keynesian ideas by assuming fixed prices and wages. Although the product and money markets are in equilibrium at their intersection, there can be disequilibrium in markets, such as the labour market. Not represented in the model.


Reference: Oxford Press Dictonary of Economics, 5th edt.