• The IS-LM model describes how aggregate commodity markets and financial markets interact to balance the interest rate and total output in macroeconomics.
  • IS-LM stands for Investment Savings - Liquidity Preference - Money Supply.
  • The model was developed as a formal graphical representation of the principle of Keynesian economic theory.
  • In the IS-LM graph, “IS” represents one curve and “LM” represents another curve.
  • IS-LM can be used to describe how changes in market preferences affect equilibrium levels of gross domestic product (GDP) and market interest rates.
  • The IS-LM model lacks the precision and realism to be a useful prescription tool for economic policy.