1. Basic Cncept Of “IS-
LM” Model
Presented by
“AMITIAN”
Amarjeet
Kumar
2. CONTENT
What is “IS-LM” model and some
features of “IS-LM”
model?
Slope of “IS” curve with suitable
diagram.
Negative relation of Rate of interest and
Income level on
the “IS” curve.
3. “IS-LM” MODEL
The “IS-LM” model translates the General
Theory of Keynes into neoclassical
terms(often called the neoclassical
synthesis).
It was proposed by John Hicks in 1937 in
a paper called “Mr Keynes.
The level of demand determines the level
of output and employment.
The “IS-LM” model is based on : The
investment-demand function, The
4. The model rests on two fundamental
assumption :
All prices (includes wages) are fixed.
There exist excess production capacity in
the economy.
The model examines the combined
equilibrium of two markets :
The goods market, which is at equilibrium
when investment equal saving, hence IS.
The money market, which is at equilibrium
5. SLOPE OF “IS” CURVE
•Slope of “IS” given by impact of
change in interest rates on investment
and hence output (through multiplier) –
likely steep
•Location of “IS” changed by
autonomous components of aggregate
demand ( e.g., autonomous investment,
8. SLOPE OF “LM”
CURVE
Slope of LM reflects interest and income
elasticity of money demand ( likely steep)
Location of LM : Expansionary Monetary
Policy raises real balances and hence
lowers interest rates at a giving level of real
income (LM curve shifts down and to right).
10. NOTE : a, b, & c denote positive relation of Rate
of Interest and the level of Income on the “LM”
M
S0 0 y₁ y₂ y₃
a
b
c
L₃y₃L₂y₂L₁y₁
E₃
E₂
E₁
r₁
r₂
r₃
(Money supply)
Demand &
Money supply
RateofInterest
M
S0 0
LM Curve
y₁ y₂ y₃
a
b
c
L₃y₃L₂y₂L₁y₁
E₃
E₂
E₁
r₁
r₂
r₃
(Money supply)
Demand &
Money supply
