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IS-LM MODEL

A formalisation of the principal elements of John Maynard Keynes’ model of the economy constructed by John Hicks in his article ‘Mr Keynes and the Classics’ (he used SI-LL for the model).

The IS, or investment-savings, curve shows the locus of combinations of income and the rate of interest where investment equals savings. The LM curve, using the same axes, shows equilibria between L, liquidity or the demand for money, and M, the supply of money. This graphical description of an economy shows at the intersection of the IS and LM curves there is both an equilibrium in the goods market, represented by the IS curve, and in the money market, shown in the LM curve.