See all related overviews in Oxford Reference ». 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.
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. Subjects: Social sciences — Economics. View all related items in Oxford Reference ».
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Economics Macroeconomics. Key Takeaways 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 macroeconomy. IS-LM stands for "investment savings-liquidity preference-money supply.
IS-LM can be used to describe how changes in market preferences alter the equilibrium levels of gross domestic product GDP and market interest rates.
The IS-LM model lacks the precision and realism to be a useful prescription tool for economic policy. Article Sources. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts.
We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy. Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation.
This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace. Aggregate demand is the total amount of goods and services demanded in the economy at a given overall price level at a given time. Keynesian Economics Definition Keynesian Economics is an economic theory of total spending in the economy and its effects on output and inflation developed by John Maynard Keynes.
Economics Economics is a branch of social science focused on the production, distribution, and consumption of goods and services. Pigou Effect Definition Pigou effect is a term in economics referring to the relationship between consumption, wealth, employment, and output during periods of deflation.
What Is the Austrian School? The Austrian school is an economic school of thought that originated in Vienna during the late 19th century with the works of Carl Menger.
Underemployment Equilibrium Underemployment equilibrium is a condition where underemployment in an economy is persistently above the norm and has entered a state of equilibrium.
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