# IS-LM Model: What It Is, IS & LM Curves, Characteristics, Limitations.

What is IS-LM Model? IS & LM Curves. Characteristics. Limitations. Why is IS curve downward sloping? The IS curve is downward sloping because it represents the relationship between interest rates and output. When interest rates are high, businesses are less likely to invest and consumers are less likely to borrow, leading to lower output.

IS and LM curve equilibrium? The IS-LM model is a macroeconomic model that describes the relationship between interest rates and asset prices. It is one of the most popular models used by economists to explain how the economy works.

The model is based on two key assumptions:

1) That people are rational and will seek to maximise their utility

2) That there is a market for all goods and services

The model is represented by two curves, the IS curve and the LM curve. The IS curve represents the relationship between interest rates and investment. The LM curve represents the relationship between interest rates and money demand.

The two curves intersect at the point of equilibrium, where the interest rate is equal to the marginal rate of substitution between money and bonds. This is the point at which the economy is in equilibrium. IS-LM model is used to determine? The IS-LM model is a macroeconomic model that is used to analyze the interrelationship between interest rates and real output in the economy. The model is named after its creators, John R. Hicks and Alvin Hansen. What determines the slope of the IS and LM curve? The IS curve is determined by the equation Y = C + I, where C is consumption and I is investment. The slope of the IS curve is determined by the marginal propensity to consume (MPC), which is the change in consumption divided by the change in income. The LM curve is determined by the equation M = L(r), where M is money supply, L is the money demand function, and r is the interest rate. The slope of the LM curve is determined by the money demand function, which is the change in money supply divided by the change in interest rate.

### What shifts the IS curve?

The IS curve is a graphical representation of the relationship between interest rates and real output, which is determined by the demand for and supply of money. The IS curve is downward sloping, which means that as interest rates increase, output decreases. The reason for this is that when interest rates are high, firms have less incentive to invest and consumers have less incentive to borrow and spend. The IS curve can shift to the right or to the left depending on a variety of factors.

One factor that can shift the IS curve is changes in the level of government spending. If the government increases spending, it will lead to an increase in output and a decrease in interest rates. This is because the increased government spending will lead to an increase in aggregate demand, which will in turn lead to higher output and lower interest rates.

Another factor that can shift the IS curve is changes in the money supply. If the money supply increases, it will lead to a decrease in interest rates and an increase in output. This is because the increased money supply will lead to lower interest rates, which will encourage firms to invest and consumers to borrow and spend.

A third factor that can shift the IS curve is changes in taxes. If taxes are increased, it will lead to a decrease in output and an increase in interest rates. This is because the increased taxes will lead to a decrease in aggregate demand, which will in turn lead to a decrease in output and an increase in interest rates.