The document presents an overview of the IS-LM model, formulated by John Hicks in 1937, which combines Keynesian and neoclassical economic theories to analyze equilibrium in goods and money markets. It emphasizes the negative relationship between the interest rate and income level on the IS curve, and the potential shifts of the LM curve due to changes in monetary policy. Overall, the model illustrates how the investment demand function and fixed prices influence output and employment levels in an economy.

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,

6. r₁
r₂
r₃
a
b
c
IS Income
RateofInterest
0 y₁ y₃y₂
∆y₁ ∆y₂
Interest Sensitive
Interest
Insensitive
Diagram of IS
curve

7. S
E₃
E₂
E₁Savings&
Investment
Income
Y₁ Y₂ Y₃
I
S
R₁
R₂
R₃
0
0
RateofInterest
Y₁ Y₂ Y₃
Income
a
b
c
45˚
Segment ‘A’
Segment ‘B’
(Equilibrium)
I₃ (R₃=4%)
I₂ (R₂=5%)
I₁ (R₁=6%)
NOTE: a , b ,& c denote negative relation of RATE OF INTEREST & INCOME LEVEL on the IS curve.

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).

9. LM
Demand & supply
Money
RateofInterest
a
b
cr₃
r₂
r₁
0 y₁ y₂ y₃
Diagram of LM
curve

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

11. The End