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The IS–LM model, or Hicks–Hansen model, is a two-dimensional macroeconomic model which is used as a pedagogical tool in macroeconomic teaching. The IS–LM model shows the relationship between interest rates and output in the short run in a closed economy .
The Mundell–Fleming model under a fixed exchange rate regime also has completely different implications from those of the closed economy IS-LM model. In the closed economy model, if the central bank expands the money supply the LM curve shifts out, and as a result income goes up and the domestic interest rate goes down.
This is the familiar IS-LM model. Like the classical approach, the IS-LM model contains an equilibrium condition that equates saving and investment. The loanable funds doctrine, by contrast, does not equate saving and investment, both understood in an ex ante sense, but integrates bank credit creation into this equilibrium condition.
The IS-LM model uses two equations to express Keynes' model. The first, now written I ( Y , r ) = S ( Y , r ), expresses the principle of effective demand. We may construct a graph on ( Y , r ) coordinates and draw a line connecting those points satisfying the equation: this is the IS curve.
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A macroeconomic model is an analytical tool designed to describe the operation of the problems of economy of a country or a region. These models are usually designed to examine the comparative statics and dynamics of aggregate quantities such as the total amount of goods and services produced, total income earned, the level of employment of productive resources, and the level of prices.
A diagram of the IS/LM model. Economic modelling is the theoretical representation of economic processes by a set of variables and a set of logical and/or quantitative relationships between them. The economic model is a simplified framework designed to illustrate complex processes, often but not always using mathematical techniques. Frequently ...
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