IS–LM model
The IS–LM model is a simplified way to explain how the money markets and real output or income of an economy move together. It takes into account the demand and supply of goods and services (the IS) and the money markets (the LM).
In the IS, Investment (I) and Savings (S) are equal to the combined demand for goods and services (aggregate demand, AD). Aggregate demand is the amount of goods and services people, businesses, and the government want to buy.
On the other hand, in the LM, the demand for money (Md) is equal to the supply of money (Ms). The demand for money is the amount of money people and businesses want to hold, and the supply of money is the amount of money the central bank puts into circulation.
The IS–LM model shows that when the demand for goods and services (IS) goes up, it will create more investment (I) and savings (S) which then leads to an increase in the demand for money (LM). This means that when people and businesses want more goods and services, the central bank will put more money into circulation so people and businesses can buy more.
So the IS–LM model helps explain how the demand for goods and services and the amount of money in circulation are related. When one changes, the other also changes.
In the IS, Investment (I) and Savings (S) are equal to the combined demand for goods and services (aggregate demand, AD). Aggregate demand is the amount of goods and services people, businesses, and the government want to buy.
On the other hand, in the LM, the demand for money (Md) is equal to the supply of money (Ms). The demand for money is the amount of money people and businesses want to hold, and the supply of money is the amount of money the central bank puts into circulation.
The IS–LM model shows that when the demand for goods and services (IS) goes up, it will create more investment (I) and savings (S) which then leads to an increase in the demand for money (LM). This means that when people and businesses want more goods and services, the central bank will put more money into circulation so people and businesses can buy more.
So the IS–LM model helps explain how the demand for goods and services and the amount of money in circulation are related. When one changes, the other also changes.