What is IS LM curve Explain ?

The IS-LM curve is a graphical representation of the relationship between interest rates and output in an economy. It is a key concept in macroeconomics that helps to analyze the equilibrium in the goods and money markets.

The IS curve represents the equilibrium in the goods market and shows the combinations of interest rates and output levels where total spending (aggregate demand) equals total output (aggregate supply). It slopes downwards because as interest rates decrease, investment increases, leading to higher output levels.

The LM curve represents the equilibrium in the money market and shows the combinations of interest rates and output levels where the demand for money equals the supply of money. It slopes upwards because as output increases, the demand for money also increases, leading to higher interest rates.

The intersection of the IS and LM curves represents the equilibrium point in the economy, where both the goods and money markets are in balance. Changes in government spending, taxes, or money supply can shift the IS or LM curve, leading to changes in the equilibrium interest rate and output level in the economy.

Overall, the IS-LM curve is a useful tool for analyzing the effects of monetary and fiscal policy on the economy and understanding the relationship between interest rates and output.

IS-LM Curve

The IS-LM curve is a graphical representation of the equilibrium conditions in the goods and services market (IS curve) and the money market (LM curve). It is used to analyze the macroeconomic effects of monetary and fiscal policies.

IS Curve (Investment-Saving Curve)

- Shows the combinations of interest rates (r) and output (Y) where the goods and services market is in equilibrium.
- Equilibrium occurs when planned investment (I) equals planned saving (S).

Equation:

```
I + G = S + T
```

Where:
- I = Investment
- G = Government spending
- S = Saving
- T = Taxes

LM Curve (Liquidity Preference-Money Supply Curve)

- Shows the combinations of interest rates (r) and output (Y) where the money market is in equilibrium.
- Equilibrium occurs when the quantity of money demanded (Md) equals the quantity of money supplied (Ms).

Equation:

```
Md = Ms
```

Where:
- Md = Money demanded
- Ms = Money supplied

Equilibrium of IS-LM Curve

The equilibrium point in the IS-LM model is where the IS curve and LM curve intersect. At this point, both the goods and services market and the money market are in equilibrium.

Effects of Monetary and Fiscal Policies

- Monetary policy (changes in Ms): Shifting the LM curve affects the equilibrium interest rate and output.
- Expansionary monetary policy (increase in Ms): Lower interest rates, increase in output.
- Contractionary monetary policy (decrease in Ms): Higher interest rates, decrease in output.
- Fiscal policy (changes in G, T): Shifting the IS curve affects output and interest rates.
- Expansionary fiscal policy (increase in G or decrease in T): Higher output and interest rates.
- Contractionary fiscal policy (decrease in G or increase in T): Lower output and interest rates.

Limitations of IS-LM Curve

- Assumes fixed prices and wages.
- Ignores international factors.
- Simplifies the economy into only two markets.
- Does not account for expectations or uncertainty.

Despite its limitations, the IS-LM curve remains a useful tool for understanding the basic macroeconomic interactions between the goods and services market and the money market.

Draw grafh of is lm curves