IS-LM Basics
This curve represents equilibrium in the goods market
IS curve
An increase in government spending shifts the IS curve in this direction.
Right
An increase in money supply shifts the LM curve in this direction.
This policy involves changes in taxes and government spending.
Fiscal policy
This model combines the goods market and money market in macroeconomics.
IS-LM model
This curve represents equilibrium in the money market.
LM curve
A decrease in taxes usually causes this type of shift in the IS curve.
Rightward shift
The LM curve represents equilibrium in this market.
Money market
This policy is controlled by the central bank to influence money supply and interest rates.
Monetary policy
This economist is famous for developing the IS-LM framework.
John Hicks
This point shows where the goods market and money market are both in equilibrium.
IS-LM equilibrium
This component of aggregate demand falls when interest rates increase.
Investment spending
As national income increases, people demand more of this.
Money balances
Expansionary monetary policy usually causes this to happen to interest rates.
Interest rates fall
In this situation, very low interest rates make monetary policy less effective.
Liquidity trap
These are the two variables shown on a standard IS-LM graph.
Interest rate and national income
The IS curve slopes downward because higher interest rates reduce investment and lower this variable.
National income
The LM curve slopes upward because higher income increases money demand and raises this variable.
Interest rate
When the central bank increases the money supply, the LM curve shifts right and this usually increases.
Equilibrium output
In a liquidity trap, the LM curve becomes nearly this shape because people prefer holding cash instead of bonds.
Perfectly horizontal line
This happens when planned spending equals actual output and money demand equals money supply at the same time.
Simultaneous equilibrium in both markets
This type of fiscal policy shifts the IS curve to the right and increases output in the economy.
Expansionary fiscal policy
This type of monetary policy decreases money supply and shifts the LM curve to the left.
Contractionary monetary policy
This effect happens when higher government spending raises interest rates and reduces private investment spending.
Crowding out effect
This happens when expansionary monetary policy fails to significantly increase output because interest rates are already extremely low.
Monetary policy becomes ineffective