Central Bank Rate Policy — IS-LM
This IS-LM graph summarizes two linked parts of a macroeconomic model. The downward IS curve represents combinations of income and interest rates that balance the goods market. The upward LM curve represents combinations that balance the money market. Where the curves meet, the model identifies a joint equilibrium for output and the interest rate. A policy discussion can then show a curve shifting in response to a change in spending, taxes, money supply or liquidity preference. The graph is an analytical simplification. It is most useful for explaining relationships and direction of change, not for producing a precise interest-rate forecast.
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Scenario
A policy seminar is introducing the interaction of output and interest rates.
Key decisions
- IS curve: represent goods-market balance.
- LM curve: represent money-market balance.
- Intersection: identify joint output and rate equilibrium.
When to reuse this
Use this model to explain introductory monetary and fiscal policy mechanics.
Frequently asked questions
What is the IS curve?
What is the LM curve?
What does their intersection show?
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